Amazon Inc. (NASDAQ:AMZN) doesn’t charge sales tax to most of its customers. The company does not expect that to last.
The largest Internet retailer supports the Streamlined Sales Tax Initiative, an effort backed by the National Governor’s Association and the National Council of State Legislatures to simplify the rules that govern how sales tax is collected. CEO Jeff Bezos is trying to “stay ahead of the curve” on the growing movement to tax e-commerce, a source familiar with the situation says.
Scott Peterson, the Initiative’s executive director, tells 24/7 Wall St. that the Seattle-based company, which collects tax in 5 states, is eager to save money on sales tax administrative costs. The company also is interested in collecting sales tax for smaller players for a fee, the source says.
Battle lines are being drawn between cash-strapped state governments and Web merchants. The stakes are high for e-commerce companies who are able to keep their prices low in part because they do not have to collect some $12 billion in sales tax annually. Amazon’s slice of that pie is probably at least $1 billion, according to estimates by 24/7 Wall St. If Amazon were to incur these additional costs, they would erode the company’s profit margins and depress its high-flying stock price, which is up more than 36% this year. An Amazon spokesperson did not respond to requests for comment.
Like every retailer, Amazon does not earn a profit on the collection of sales tax. Consumers do not pay it much attention when purchasing lower-priced items such as books. Sales tax, though, becomes an issue for pricier goods such as consumer electronics. Opponents of expanding collecting the tax on the Web dispute this notion.
Consumers are supposed to report their purchases to their state and pay what is known as a use tax. Most don’t bother, which is why officials are ratcheting pressure on Amazon and its competitors to collect additional sales tax. E-commerce purchases – expected by Forrester Research to top $250 billion this year — are too good of a revenue source to pass up.
States, which closed budget shortfalls of more than $430 billion in fiscal years 2009-2011 combined, will continue to face huge deficits through at least 2013, according to the Center on Budget and Policy Priorities (CBPP). Taxing Internet sales, which now is restricted by two Supreme Court rulings, would help ease the problem and level the playing field between Amazon and web divisions of bricks-and-mortar chains such as Wal-Mart Inc. (NYSE:WMT) and Target Corp. (NYSE:TGT), which do collect the revenue for states.
“It would certainly affect their profits somewhat,” says Michael Mazerov, a senior fellow at CBPP, in an interview. “They certainly do get an unfair pricing advantage.”
States are hamstrung in their efforts to collect taxes on Internet sales by two Supreme Court rulings in cases involving catalog companies which argued that states could only tax retailers that had a nexus or physical presence of either people or property within their borders. Moreover, The Internet Tax Freedom Act created a moratorium on any new taxes on electronic commerce. Rep. Bill Dellahunt (D-MA) introduced legislation in July to force online retailers to collect sales tax. It never made it out of committee.
States are coming up with creative solutions to these obstacles even as chances for federal legislation seem to be remote, particularly after the Republicans take over the House of Representatives. E-retailers are fighting them tooth and nail.
“The fairness issue holds no water,” says Steve DelBianco, executive director of NetChoice, a lobbying group backed by e-commerce interests such as Yahoo Inc. (NASDAQ:YHOO), Expedia Inc. (NASDAQ:EXPE) eBay Inc. (NASDAQ:EBAY), which opposes any Internet taxes. “Prices are lower because these vendors retain a smaller infrastructure … Some business models are purely online.”
NetChoice, which argues that proponents of Internet taxation inflate its potential financial rewards to states, found in a study that 17 of the top 20 e-retailers have stores in at least 30 states, so they collect sales tax for shipments into those states. “I’m talking about retailers like Best Buy (47 states), Victoria’s Secret (45 states), SonyStyle.com (47 states), etc,” he says. As “brick and click” (retailers with both substantial online and physical presences) grows, the amount of uncollected taxes should drop, the group says.
Mazerov, however, remains unpersuaded.
“Clearly, Amazon isn’t and many other companies are not,” he says. “There are thousands of small and mid-sized companies that are not collecting the tax except in their home states.”
Critics say that the burdens of such a tax would also fall on smaller retailers who might not be able to comply with thousands of different sales tax rules and regulations. “For the medium-sized remote sellers it is a tremendous problem,” says Jerry Cerasale, a senior vice president with the Direct Marketing Association. In an interview, Mazerov says he supported exempting very small businesses and that large enterprises are ” perfectly capable of dealing with this so-called burden. ”
One way that some states such as New York have tried to get around that prohibition is to argue that Amazon has a “physical presence” in the state through affiliated websites. Amazon is collecting the tax – dubbed the Amazon tax – while it pursues a legal challenge. It has also canceled its affiliate agreements in states that enact these laws. Amazon taxes have passed in North Carolina and Colorado. and are pending in about a dozen others. In April, Amazon filed suit against demands from North Carolina tax collectors over a requests for purchase records from state residents. As CNET noted, “…North Carolina tax collectors visited Amazon in Seattle last month in an effort to “obtain information from Amazon regarding Amazon’s sales to North Carolina residents. They hand-delivered a letter that amounted to an ultimatum: provide customer names by April 19 or face the consequences. “ After the Colorado bill passed, Amazon ended its affiliate program in the state. It also took the same step in North Carolina.
Governors in California and Hawaii vetoed bills passed by their Legislatures. California Gov. Arnold Schwarzenegger said after his 2009 veto last year, “With unemployment at an all time high, we should be doing everything we can to – keep jobs and create jobs – in California.” Republican Governor Linda Lingle of Hawaii criticized the bill as not being well though-out. Schwarzenegger is leaving office and will be replaced by Democrat Jerry Brown. Lingle was succeeded by Democrat Neil Abercrombie. Both may be more sympathetic to the Amazon tax than their predecessors.
Besides New York, Amazon also collects sales tax from Kansas, Kentucky, North Dakota and Washington State because it has a physical presence there. Diamond Internet retailer Blue Nile Inc. (NASDAQ: NILE), which is based in Seattle. Overstock.com Inc. (NASDAQ:OSTK), another major web-based retailer, collects revenue from customers in its home state of Utah.
Another way that states is through the Streamlined Sales Tax Initiative, which seeks to simplify the rules that govern how sales tax is collected in more than 7,000 different jurisdictions. The effort, which has been passed by 24 states, began as an answer to the latest Supreme Court’s decision in the 2000. It is part of coalition that is lobbying Congress to remove the physical presence requirements. Should Congress ever agree to such an idea, and many think that it won’t, that would force internet retailers to collect sales tax who don’t do it already. This would also apply to catalog sales and sales done through the television.
The Initiative seeks to make the administration of the sales tax in one state the same as the other. To do that, officials need to change the terms in their regulations so that one type of good is either taxed or exempt in the same way in different states. Critics argue that the sales tax remains a confusing mess for many retailers despite the group’s efforts.
“What we are asking states to do is not a simple thing,” says Peterson, who oversees the effort, in an interview.
Neither is figuring out how to tax the Internet but it’s a challenge states say they are up to whether Amazon and other Internet retailers like it or not. They can either accept the inevitable or face legal fights in 50 states. Amazon is large enough to try to tailor tax policy to its liking.
–Jonathan Berr
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