Here's the controversial tax practice by Amazon that's got Trump so upset

  • President Trump criticized Amazon over taxes on social media Thursday.
  • Amazon does collect state sales taxes on products it sells directly in all 45 states that have a state sales tax.
  • But the company still doesn't collect state sales taxes for its "third-party" platform sellers in most of the country.
  • Some states have passed laws requiring online marketplaces to collect sales taxes on behalf of third-party sellers. On April 1, Pennsylvania will become the second state, after Washington, where Amazon is instituting Marketplace Tax Collection for third-party sellers.

President Donald Trump blasted Amazon over taxes Thursday saying the company pays "little or no taxes to state & local governments."

He is focusing on Amazon's practice of not collecting state sales taxes for "third-party" sellers on its platform in most of the country.

The comment came one day after Axios reported he wants to "go after" the e-commerce giant and alter its tax treatment, which sparked a 4.4 percent decline in the company's share price Wednesday.

Deputy press secretary Lindsay Walters confirmed Thursday that Trump was referring to third-party sellers on Amazon's site when he criticized the company over taxes.

Wall Street is downplaying Trump's tax threat against Amazon because the company already collects state sales taxes on products it sells directly.

"In our view, this ship has already sailed. Amazon has been charging sales tax to customers — for its 1P [first party] sales – in all the 45 states that have a statewide sales tax," Deutsche Bank analyst Lloyd Walmsley wrote in a note to clients Wednesday. "In a way, we think charging sales tax has been a boon to Amazon because it now has extensive fulfillment facilities close to consumers such that it can lead the way in offering faster and more reliable deliveries. Whether Congress enacts a special tax on Amazon, simply because President Trump wants it, remains to be seen."

But Trump is referencing the company's lack of sales tax collection on its third-party platform sales outside a handful of states. The third-party business represents roughly half of Amazon's unit sales, according to Stifel.

Some retail competitors argue this policy for third-party vendors that sell on Amazon's platform gives it an unfair advantage.

Treasury Secretary Steven Mnuchin hinted in July that the administration may soon take "a position" on Amazon's tax collection policy, referring to the e-commerce giant's third-party marketplace.

At a Senate hearing on July 26, Sen. Joe Manchin, D-W.Va., asked the Treasury secretary about his view on internet state sales taxes.

"So this is an issue that we've been looking at very carefully within the administration, and we expect to come out with a position shortly," Mnuchin said. "I am encouraged that Amazon is now charging tax, I believe, on their own sales but not the marketplace. I'm not sure I understand the consistency on that, but I respect the states' ability that there's an awful lot of money that's not being collected."

More recently, Mnuchin told the House Ways and Means Committee hearing in February that the administration "feels strongly" the government should institute a sales tax on internet e-commerce.

Some states have passed laws requiring online marketplaces to collect sales taxes on behalf of third-party sellers. On April 1, Pennsylvania will become the second state, after Washington, where Amazon is instituting Marketplace Tax Collection for third party sellers.

The new law in Pennsylvania requires sales tax collection regardless of whether the merchant has a physical operation in the state.

Previously, Amazon left it to third-party merchants on the platform to handle their own tax collection where applicable.

The whole Amazon third-party tax issue could get settled in court. Earlier this year, the Supreme Court agreed to listen to arguments over internet sales taxes.

The high court ruled in 1992 that states couldn't collect sales taxes gathered by mail-order catalog companies unless the firms had a physical presence in a state. South Dakota and several other states argue that things have changed in the era of Amazon.

The Supreme Court is expected to hear the arguments in April and could make a ruling by the end of June. Earlier this month, the Trump administration, through Solicitor General Noel Francisco, formally backed up South Dakota in the case.

"The executive branch has weighed in on the litigation and has encouraged the court to take a fresh look on the Quill decision and to uphold the South Dakota law that would get rid of the problem," Deborah White, president of the Retail Litigation Center for the Retail Industry Leaders Association, told CNBC. "There will always be a role for Congress to regulate interstate commerce. But we are asking the court to level the legal playing field and remove the advantage that the court gave remote retailers."

It isn't clear how much of an impact a potential South Dakota victory would have on Amazon's business given it will affect other online platforms as well.

Ironically Amazon itself doesn't pay much in state taxes relative to its revenue size.

Amazon reported a provisional tax expense of roughly $200 million for U.S. state taxes in 2017, according to a securities filing. That may seem like a lot but the company generated $177.9 billion in sales last year.

Amazon declined to comment.

— CNBC's Ari Levy and Jacob Pramuk contributed to this report.

Correction: An earlier version gave an incorrect rate for sales taxes in Philadelphia.

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