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Amazon Pressured on Sales Tax

Across the country, state officials struggling with big budget shortfalls are trying to get Amazon.com to take on a role it does not want: tax collector.

Amazon.com's fulfillment center in Fernley, Nevada.
Ben Margot
Amazon.com's fulfillment center in Fernley, Nevada.

Amazon’s skirmishes with states over whether it should collect sales taxes have been an ongoing battle.

But the fighting has recently escalated, coinciding with the economic woes that have left a number of states struggling with multibillion-dollar deficits, and looking for money wherever they can find it.

Last Thursday, Gov. Pat Quinn, Democrat of Illinois, signed a law that compels online retailers that work with affiliates in his state to collect sales tax on purchases by residents.

Affiliates are partner sites that earn commissions by advertising or linking to an online retailer’s products, sending traffic that way. Lawmakers in California, Hawaii, New Mexico, Minnesota and Vermont have introduced similar legislation.

Amazon, based in Seattle, is fighting back. It vehemently opposes the legislative efforts, and in letters to state officials, has called the provisions unconstitutional and counterproductive.

“We play by the same rules as other retailers, as the national chains collect online only for states where they have physical stores,” Paul Misener, Amazon’s vice president for public policy, said in a statement.

Meanwhile, last fall, Texas officials sent Amazon a tax bill for $269 million, after determining that the retailer’s Dallas-area warehouse, owned by a subsidiary, qualified as a local address under state tax rules.

Amazon had argued for years that without stores and offices in the state, it had no obligation to collect sales tax there. The dispute is to be decided in a coming administrative hearing.

In retaliation for Texas’s move, Amazon said last month that it would close the warehouse next month and cancel plans to build another.

“It’s a time-honored custom to not pay taxes,” said Susan Combs, the Texas comptroller. “A lot of people try not to, but it’s up to the state to make sure that there’s tax fairness.”

The new laws are intended to help fill state coffers as lawmakers are being forced to cut funding to education, Medicaid and public safety.

The changes are also promoted as leveling the playing field between online retailers and brick-and-mortar stores, which must tack on an extra 8 percent in most states, give or take, to the price of every transaction.

A state can compel companies to collect taxes only if they have a physical presence in the state, or a nexus, as the Supreme Court ruled in Quill Corporation v. North Dakota in 1992.

Absent a nexus, online retailers and mail-order companies can sell products without collecting the tax. What many people fail to realize, however, is that the tax is still due.

Residents are supposed to self-report what they owe in their annual state tax filing, but most people do not.

State officials have long lamented the shortfall and sought ways to collect a bigger portion by using a mix of education and threats. California, for instance, expects to be shortchanged $1.15 billion in 2010 from e-commerce and catalog sales, according to estimates from the state Board of Equalization.

The only way to close that gap is for online retailers and others to start collecting sales tax, said Betty T. Yee, a member of California’s Board of Equalization.

“There seems to be a groundswell of activity by other states that suggest that the time is right,” she said.

Eliminating the tax gap would provide more than enough money to offset proposed cuts to California’s universities or to its programs for the developmentally disabled.

But Ms. Yee said any law would most likely be challenged in court and would therefore be unlikely to lift state revenue for some time.

Amazon collects sales tax in only five states — Kansas, Kentucky, New York, North Dakota and Washington — where it has offices or another physical presence.

It avoids collecting in several other states where it has warehouses by assigning their ownership to a subsidiary. Until the tax dispute in Texas, Amazon had encountered few problems with that arrangement.

Now, though, as Amazon seeks to open warehouses in South Carolina and Tennessee, it is also pressing for specific legislation to exempt it from collecting sales tax, using the jobs created by the facilities as leverage.

But the company is running into some resistance. For example, in Tennessee officials canceled a hearing last month about adjusting tax rules after the governor imposed a 45-day moratorium on new regulations.

In South Carolina, legislation that had exempted Amazon from collecting tax has expired; it is unclear whether it will be renewed or not.

“The governor is taking a hard look at the issues surrounding Amazon,” said Rob Godfrey, a spokesman for South Carolina’s governor, Nikki Haley.

“Economic development and job creation are two of her highest responsibilities and priorities, and while the governor wants to make sure we keep promises made to companies, she also wants to make sure we are being fair to the companies that we already have in this state.”

Amazon’s fight in California, as in Illinois and other states, revolves around its affiliates. Lawmakers are trying to broaden the definition of physical presence in the state to include partner sites of all retailers, not just Amazon.

Amazon’s response in California, as in other states, has been to threaten to sever ties with affiliates if such laws are passed. In that way, the company can circumvent any sale tax requirements.

It took the first step to carry out the threat in Illinois last week, saying it would eliminate its affiliate program there on April 15.

Amazon has previously dropped affiliates in Rhode Island, North Carolina and Colorado under similar circumstances.

George Runner, a member of California’s Board of Equalization, which collects several kinds of taxes, said changing tax laws would end up hurting Amazon’s 10,000 affiliates in the state.

Amazon would simply continue selling products directly from its Web site or through out-of-state affiliates, without having to collect tax on the government’s behalf, he said.

California would end up with no extra money, Mr. Runner said, despite predictions otherwise. In fact, it may get less considering the financial damage done to Amazon’s affiliates.

“If the argument is revenue, we don’t believe it will happen,” Mr. Runner said.

Amazon is challenging the legality of a New York law enacted in 2008 that requires it to collect taxes based on its affiliates. The case is currently in the state appeals court.

Meanwhile, New York collected $70 million in sales tax from online retailers, including Amazon, for fiscal year 2009-10, according to the state Department of Taxation and Finance.

Despite its protests to collecting the sales tax, Amazon supports a streamlined system simplifying the current hodgepodge of state and local levies. But a streamlined system, which has the support of two dozen states, requires Congressional action.

Traditional retailers like Sears , Barnes & Noble , Best Buy and Wal-Mart applaud efforts to require Amazon to collect sales tax.

They call it a matter of fairness because their stores do.

“I think it puts all retailers at a disadvantage,” William R. Harker, senior vice president at Sears Holdings, said of Amazon’s sales tax obligations.

“What we and other retailers are looking for is for the playing field to be level.”

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