Tuesday, March 01, 2011

Are Amazon.com’s Days Of Tax-Free Selling Numbered?

Experts are speculating momentum is building to finally force companies like Amazon to pay local tax rates like regular mom and pop shops would. What do you think, should the retail giant be allowed to continue avoiding local sales taxes?

Forbes.com reports:

    Hasn’t Amazon successfully fended off pesky state tax collectors for 16 glorious years? Yes, but the battle has entered a new stage as Amazon builds warehouse/fulfillment centers in more locations, states grow hungrier for revenue, and a rising sales tax rate (it now averages 9.64% nationwide) puts retailers who do collect tax at an ever bigger disadvantage.

    The back story is well known: 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.

    Bezos made the most of Quill. He based his business in Seattle, instead of the Silicon Valley, to avoid having to charge California customers sales tax. He located his first East Coast distribution center in sales tax free Delaware. Some big bricks and mortar retailers, including Barnes & Noble, Borders and Wal-Mart, tried to avoid collecting taxes online, too, by setting up separate operations to sell on the Internet. But after enduring state audits and lawsuits—and also after recognizing the advantage of integrating their online and store operations–the bricks & mortar merchants started collecting taxes online.

    Today, Amazon is not only the biggest retailer on the web, but also the only one of the top 10 (for 2009 as ranked by InternetRetailer) which doesn’t collect sales tax from most buyers. Dell, No. 3 on the list, finally began collecting sales taxes in 2006. (More history, here.) Once they started collecting taxes on-line, the traditional retailers joined with the states in lobbying Congress to require Internet tax collection. (There’s not much chance of that passing this year, says Grant Thornton partner Jamie Yesnowitz.)

    Meanwhile, the states have tried a variety of attacks. Most notably, in 2008, New York passed a law which presumes Internet sellers like Amazon.com and Overstock.com have nexus if they have marketing deals with “affiliate” sellers who are physically present in New York. Amazon is challenging the law in court (so far, unsuccessfully), but it now collects sales taxes on shipments to New York. It also collects for shipments to Washington, as well as North Dakota, Kansas, and Kentucky—states where it set up physical operations early on. (My colleague, Janeace Slifka, calculates that 87% of Americans live in a state that charges a sales tax Amazon doesn’t collect.)

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