Has Amazon Lost The South In The Internet Tax War? [News Report]

by Avinash Saxena

It’s one thing when Illinois’ lame-duck Democratic legislature votes to impose an Internet sales tax modeled on New York’s so-called “Amazon” tax and a Democratic governor signs the bill. Or when Connecticut Democrats agree on a similar bill as part of a raise-every-tax-in-sight package.  Or even when Arkansas’ Democratic governor signs an Amazon tax, as he did earlier this month.  Arkansas is, after all, home to Wal-Mart, which collects sales taxes on its Internet sales and wants Amazon.com to be forced to do the same.

But Amazon suffered defeats this week in two of the most anti-tax, red states in the nation. On Tuesday, Texas House members voted  122-23 to pass H.B. 2403 (legislative analysis here) which bolsters Texas Comptroller Susan Combs’ battle to collect $269 million in back sales taxes from Amazon, based on a warehouse the giant Internet retailer has been operating in the state.

And on Wednesday, South Carolina’s House voted 71 to 47 to reject a special sales tax collection exemption for a partially-built Amazon warehouse that would have brought 1,250 jobs to the state.  In a post-vote analysisThe State newspaper in Columbia attributed Amazon’s defeat to “pressure from small merchants, other national retailers and Tea Party activists.”  The Tea Party? Wow.

Make no mistake. As comments on my blog demonstrate, many anti-tax activists oppose the collection of tax on Internet sales. But Tea Party types don’t necessarily cotton to special breaks for big companies, which is how the South Carolina legislation came to be viewed.

Back in 1992, the U.S. Supreme Court ruled in Quill v. North Dakota, that only sellers with a physical presence (“nexus” in taxspeak) in a state are required to collect that state’s sales taxes. Just shipping into a state by say, FedEx or UPS, isn’t enough to establish nexus. Consumers still owe “use” (meaning sales) tax to their states, but few bother to pay. Amazon founder Jeff Bezos has brilliantly exploited Quill,  for example basing his business in Seattle, instead of the Silicon Valley, to avoid having to charge California customers sales tax. Currently, Amazon collects sales tax on shipments to residents of only five states.  But as I suggested in February,  the states’ hunger for revenues, ramped up pressure from traditional retailers, and Amazon’s own need for physical distribution facilities could mean that Amazon’s days of tax free selling are numbered.

In the South Carolina case, the administration of former Republican Governor Mark Sanford had promised to push through legislation that would exempt Amazon from having to collect sales taxes from state residents despite the warehouse.  Sanford’s successor, Republican Nikki Haley, said she didn’t favor the exemption, but wouldn’t veto it. After the vote, however, she delivered a rebuke to Amazon, in which she suggested it had demanded too many breaks for its low paying jobs. Said Haley (video here) : “They got free property, they got tax incentives, they got plenty of things. Don’t ask us to give you sales tax relief when we’re not giving it to the book store down the street…It’s just not a level playing field.”

Billy Hamilton, an Austin public finance consultant and former Texas deputy comptroller,  points out that red states politicians, having “drawn a firm line in the sand that says we’re not going to raise taxes, no matter what” are desperate for any revenue they can get by enforcing current laws or  in the name of  fairness.

“I think one of the important shifts here that you’ve seen just in the last six months to a year has been it’s not just one party. It’s a bipartisan governor approach,’’ observed Joe Rinzel,  Vice President of State Government Affairs for the Retail Industry Leaders Association, during a conference call hosted earlier this month by Janney Montgomery Scott retail analyst David Strasser.

Amazon is hardly waiving the white flag in either red states or blue ones.  The new Illinois and Arkansas laws assert that Internet sellers must collect state sales taxes if  they get business from Web marketing affiliates based within the state. So Amazon has terminated its Illinois and Arkansas marketing affiliates, as has Overstock.com. It has also threatened to end deals with affiliates in Connecticut, California or any other state that passes legislation modeled on the 2008 New York Amazon law. (Amazon didn’t cut off New York affiliates. Instead, it is collecting New York sales tax while it challenges the constitutionality of that law in court.)

Even more dramatically, Amazon says it has canceled $52 million in contracts to finish the partly built South Carolina project and is “in the process” of closing its Texas warehouse, throwing 110 employees there out of work. (Amazon is fighting the $269 million Texas back tax bill on the grounds that its warehouse is run by an “affiliate, but not subsidiary, of the Amazon retailing entity” and so doesn’t give it sufficient nexus to have to collect Texas sales taxes. The bill passed by the Texas House is designed to make it clear that such an affiliate gives a retailer nexus. Amazon disclosed this week that the SEC is looking into its tax dispute with Texas.)

Meanwhile, Amazon is beginning to hire for two warehouses it started building in Tennessee after the administration of former Democratic Governor Phil Bredesen promised Amazon wouldn’t have to collect sales tax based on the facilities. Current Republican Governor Bill Haslam  has said he will honor his predecessor’s commitment, which was based on an interpretation of the state’s current law and apparently won’t require new legislation.   But Tennessee Republicans are continuing to question —if not directly threaten—the Amazon deal and Haslam is now calling for Congress to pass legislation that would force Internet retailers to collect sales taxes. (Senator Dick Durbin, an Illinois Democrat, is preparing to introduce such a bill, but it has little chance of clearing the Republican controlled House.)

So Amazon will be able to avoid collecting sales tax from most Americans for some time to come. Still,  retail analyst Strasser points out that Amazon has built its competitive edge not only on charging no tax, but also on its efficient distribution. If Amazon locates warehouse/fulfillment centers only in states that agree to give it a pass on sales taxes,  it could end up losing that distribution edge, particularly when it comes to large items, like televisions, Strasser argues.  “Ultimately, they’re going to have to compete with Best Buy, and Target and Wal-Mart and Office Depot andStaples for efficiency,’’ he says.


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