Amazon.com has been criticized for collecting sales taxes from customers in only five U.S. states. Several states have passed or are considering "Amazon tax" laws designed to compel Amazon to collect local sales and use taxes from customers. The U.S. has no federal sales tax.
In most countries where Amazon operates, a sales tax or value added tax is uniform throughout the country, and Amazon is obliged to collect it from all customers.
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Proponents argue that Amazon collects sales tax from just five states, thus giving it a comparative advantage over brick-and-mortar retailers. This would be true, if the extra shipping charge that isn't added at brick-and-mortar stores were ignored. Possibly, such customers should pay the equivalent amount in use tax directly to their state; however, few customers do so. Amazon is under increasing legal and political pressure from state governments, traditional retailers and other groups because of its refusal to collect sales tax in 40 of the 45 states with a statewide sales tax (as of May, 2011). Those 40 states include at least 12 where Amazon has a clear physical presence[1] via distribution centers and wholly owned subsidiaries. Critics of Amazon argue that its refusal to collect sales taxes has given it an unfair advantage over traditional retailers, ignoring the additional shipping charges that Amazon customers shoulder. While customers are required to remit use tax directly to their state, few customers do so.
Amazon says it would support a federal solution to the sales tax problem as long as such legislation was fair and simple. As of May 2011 legislation has been introduced in Congress to allow states to impose sales taxes on sales to their residents from out-of-state. Amazon has not stated a public position on the bill. Amazon's competitors say it is insincere. Similar legislation, called the Main Street Fairness Act, failed in committee in 2010. Several earlier versions of the bill also failed to advance. Amazon lobbyists met four times with members of Congress or their aides in 2010 regarding the Main Street Fairness Act. The company spent $610,000 on lobbying in 2010, although these expenses also covered other bills discussed at the same time. Amazon has increased political contributions to federal lawmakers. Amazon's political action committee spent $214,000 during the 2010 election cycle, double what it spent for the 2008 elections.[2]
Under current state laws, consumers are generally responsible for paying the sales tax due on their online purchases. Due to problems with compliance there is a growing trend among states to require online retailers to report consumers' purchases to state tax agencies in order to ensure compliance. Some consumer advocacy groups believe such reporting requirements violates consumer privacy. By shifting the remittance of sales tax from consumers to retailers, the Main Street Fairness Act makes reporting customers' purchases to the state unneces-sary. Once the Main Street Fairness Act becomes law, consumers will no longer be expected to track every internet purchase, and they will not have to worry about their online purchases being reported to the government.
In addition to protecting consumer privacy supporters of the Main Street Fairness Act say it will benefit state and local governments by increasing tax revenue and protect local businesses from unfair competition that exploits what they see as a tax loophole.
H.R. 5660, introduced in 2010, would have simplified existing sales tax collection laws and therefore eliminated the need for states to enact reporting laws that may threaten consumer privacy. It also had the potential to deliver billions of dollars in sales tax revenue to local communities-without raising taxes or creating a new tax. Specifically, H.R. 5660 would have allowed state governments to require large out-of-state retailers to collect and remit sales tax on purchases shipped to those residents of those states. H.R. 5660 was introduced by William Delahunt, a Democrat from Massachusetts.
In 2010 Arkansas passed a bill requiring Amazon to collect sales tax. The bill took advantage of Amazon's use of affiliates based in Arkansas to establish the necessary physical nexus. Amazon responded by terminating the contracts of its Arkansas-based affiliates effective 24 July 2010.[3]
Rep. Nancy Skinner pushed legislation to tax online sales that was approved in 2009 as part of the state budget. Gov. Arnold Schwarzenegger vetoed the legislation.[4] On 19 January 2011 Skinner introduced similar legislation in the form of AB153 that later became law. The bill required out-of-state online sellers with affiliates in California to collect sales tax on purchases made by state residents. The affiliate provision was included to ensure that only sellers with a California nexus are taxed, as required by federal law.[5] "This legislation will close the current loophole in tax law which has allowed out-of-state companies to avoid collecting California sales and use tax," stated Skinner.[4] Skinner estimated that AB153 could produce between $250 million and $500 million per year in new revenue. She and other supporters of the bill believe that the election of Jerry Brown to the governorship and support from retailers such as Barnes & Noble will help the measure become law.[6]
In 2011 Amazon threatened to terminate roughly 10,000 of its affiliates located in California if legislation pending in the state legislature to deem such affiliates as constituting a nexus that requires the collection of sales tax is passed. California affiliates would no longer receive commissions on referrals to Amazon.[7] As of March 2011 four bills are pending in the state legislature would define the use of associates located in California-* for sales referrals as activity subject to taxation by California. In a letter addressed to California's Board of Equalization, the agency responsible for collecting sales taxes, Amazon called such legislation "unconstitutional" and said it would terminate its California affiliates if passed. "If any of these new tax collection schemes were adopted, Amazon would be compelled to end its advertising relationships with well over 10,000 California-based participants in the Amazon 'Associates Program,'" wrote Paul Misener, Amazon's Vice President for Global Public Policy.
Responding to Amazon, Nancy Skinner said, "This is really about e-fairness. It's really to be fair and show our California Business that we're not hanging them out to dry.".[8] According to the American Independent Business Alliance, the corporation has operations in at least seven California cities and should be forced to collect sales tax regardless of its threats.[1]
In July 2011 Amazon made good on its promises to terminate California affiliates. According to the Performance Marketing Association, there were 25,000 Amazon affiliates based in California.[9] However, On Amazon's website, under "United States Subsidiaries," listed are four California locations for A2Z Development Center Inc. - "an innovative customer-centric software development company" - including in San Francisco and Cupertino, where the Kindle was designed; a search engine company called A9.com in Palo Alto; and, in San Francisco, Alexa, another Amazon search company.[10]
Due to its opposition to rules that would require the company to collect sales tax Amazon.com is facing a boycott from a coalition of California non-profits .One of the groups behind the boycott, Think Before You Click CA, says improved sales tax enforcement will bring in $200 million per year in additional revenue and encourage people to shop at local traditional retailers instead of online.[11]
In response to resistance from Amazon.com, other online retailers, and anti-tax groups the State of California agreed to delay of one year before requiring online retailers to begin collecting sales tax on sales to California addresses.[12] In return for the one year delay from California Amazon.com says it will create 10,000 full-time jobs, 25,000 seasonal jobs, invest $500 million in various facilities in California over the next few years, and begin remitting sales taxes on orders shipped to California. Amazon is seeking "a lasting partnership with the state," said Amazon Vice President Paul Misener. Amazon said it will reinstate their California affiliates as early as this week in response to California temporarily repealing its sales tax law.
Governor Jerry Brown said, "This landmark legislation not only levels the playing field between online retailers and California’s brick-and-mortar businesses, it will also create tens of thousands of jobs and inject hundreds of millions of dollars back into critical services like education and public safety in future years."
In response to HB 10-1193 passed in 2010 Amazon.com terminated its relationship with all affiliates located in Colorado. The bill originally sought to tax sales to Colorado residents by online retailers with Colorado affiliates. The bill was amended to remove all reference to affiliates in order to discourage Amazon from cutting ties with them. The final bill required large online retailers to either remit tax on sales to Colorado residents or provide information on Colorado customers to the state. In spite of this move Amazon still decided to terminate its Colorado affiliates.[13]
In May 2011 Gov. Dannel P. Malloy signed legislation that requires online retailers to collect sales tax if they have Connecticut-based affiliates. The legislation aims to raise $9.4 million. Amazon said Connecticut’s legislation violates Quill Corporation v. North Dakota and immediately moved to terminate its affiliate relationships in Connecticut. Amazon accused traditional retailers such as Wal-Mart of being behind Connecticut's new law.[3]
“We opposed this new tax law because it is unconstitutional and counterproductive. It was supported by big-box retailers, most of which are based outside Connecticut, that seek to harm the affiliate advertising programs of their competitors. Similar legislation in other states has led to job and income losses, and little, if any, new tax revenue," Amazon said in a letter to its affiliates.[3]
In an editorial supporting tax equity for online sales the St. Petersburg Times wrote, "The bookstore chain Borders did not cite Florida's outdated sales tax law last week when it announced it would shutter four of five Tampa Bay stores as it enters Chapter 11 bankruptcy proceedings. But the competitive disadvantage for the state's retailers that the Florida Legislature refuses to address is at least partially to blame. As long as Internet-only sellers such as Amazon.com can get away with not collecting state sales tax and effectively sell their products for at least 6 percent less, Florida merchants pay the price. It's past time for lawmakers to work toward a level playing field."
In an editorial The State criticized the incentives given to Amazon to build a distribution center in Lexington. They wrote that deal with Amazon created "...yet another exemption in our Swiss-cheese tax code, and surrender[ed] what little leverage we have to collect taxes on the fastest-growing segment of the retail sector — from which we derive the largest share of the revenue that runs state government. It’s only a small step from giving Amazon a five-year exemption from collecting the sales taxes from S.C. residents to giving that same break to WalMart, Target and all the other businesses that offer online shopping — as one Senate amendment actually proposed to do."[14]
Illinois has passed legislation to tax online sales made to consumers located in the state. In March 2011 Gov. Pat Quinn signed the "Main Street Fairness Act," which targets online retailers with Illinois affiliates. Quinn said the act would help create fair competition and generate more revenue for the state. Illinois estimates that it loses $153 million in sales taxes every year due to the fact that out-of-state retailers do not remit sales tax on purchases made by Illinois residents. Some online retailers have responded to this legislation and similar efforts in other states by threatening income tax revenues collected from their online affiliates. Amazon, along with Overstock.com, has threatened to terminate affiliates in states that demand that sales tax be collected by online retailers, including Illinois.[15] Wal-Mart responded by inviting online businesses based in Illinois to join its affiliate network.[16]
The Illinois Policy Institute has said that the law has been "all pain and no gain." While it was "aold as a significant revenue raiser and a step toward improved tax fairness, it is accomplishing little more than pushing online entrepreneurs out of state."[17]
In September 2011 legislation was introduced in Michigan to require that out-of-state online retailers collect sales tax on purchases shipped to Michigan residents. The legislation has the support of the Michigan Retailers Association. Bills to be introduced by Reps. Eileen Kowall, R-White Lake Township, and Jim Ananich, D-Flint, would move online-only retailers under the same sales tax collection laws under which brick-and-mortar businesses operate. Closing this "tax loophole" could be expected to create as many as 1,600 new jobs and increase brick-and-mortor sales in Michigan by as much as $126 million according to a report released on September 22, 2011.[18]
Two legislators in Missouri have proposed joining the Streamlined Sales Tax Project to ensure that the state collects sales tax on goods shipped from online retailers located out-of-state. Currently Missourians are required to remit use tax for purchases made online but the state government has no practical method to force compliance. Legislative staff report that taxing online sales should significantly increase revenue. Rep. Margo McNeil cited a University of Tennessee study saying that Missouri stands to lose $187 million in 2011 by not taxing online sales. McNeil also said the streamlined sales tax is a good way to end the unfair advantages enjoyed by online retailers over traditional businesses. "The tax is a step in trying to even the playing field because right now we have a lot of people who are going in and using the stores as a showroom and then going home and buying on the Internet ...," McNeil said.[19]
In 2008, New York State passed a law that would force online retailers to collect sales taxes on shipments to state residents.[20] Shortly after the law was signed, amazon.com filed a complaint in the New York Supreme Court objecting to the law.[20] The complaint wasn't based on whether in-state customers should pay tax, but upon the long-standing practice of it being the responsibility of the customer to report the sales tax (known as use tax in this case) and not that of the out-of-state businesses.[20] The lawsuit was tossed out of court in January 2009, when New York State Supreme Court Justice Eileen Bransten stated "there is no basis upon which Amazon can prevail."[21]
As of 2011 O.co is suing New York state to prevent being required to collect sales taxes on goods shipped to New York residents. In order to comply with the physical presence requirement of Quill Corp. v. North Dakota the law targets out-of-state retailers who make use of New York based affiliates. O.co argues that the use of affiliates is not enough to meet the physical presence test and that the law thus violates the Commerce Clause. In addition to filing suit, O.co has terminated its 3,400 affiliates in New York.[22]
Legislation that would have required Amazon to collect sales tax on purchases shipped to Nevada failed in committee in the state legislature in May 2011. The legislation was proposed by the Retail Association of Nevada and was expected to generate $16 million annually in additional sales tax collections. Concerns about whether such a move might prompt Amazon.com to close its distribution center in the state were partially responsible for derailing this legislation.[23]
A study released by the University of Cincinnati in October 2011 determined that Ohio's state government could increase tax revenue by at least $200 million per year if Congress were to require online retailers to collect and remit sales taxes. Ohio consumers who make online purchases are already required to self-report and pay sales tax but compliance is rare. According to the study, even though more than 60 percent of households in the state made at least one purchase from an online retailer in 2010 less than 1 percent of Ohio state income tax returns included tax payments for such purchases.
Amazon had agreed to open a distribution center near Columbia, South Carolina that would employ 1,200 people in exchange for a five-year exemption from collection of sales taxes from shoppers in South Carolina. The state House of Representatives rejected the deal in April 2011 and Amazon cancelled plans for its distribution center. Amazon resumed negotiations and offered 2,000 jobs in exchange for a sales tax exemption and other incentives. Under a compromise approved by the South Carolina state legislature in May 2011, Amazon agreed to notify South Carolina customers by email that sales tax was owed on their purchases but shoppers would still be responsible for paying the tax by themselves. Governor Nikki Haley says she plans to allow the bill to become law without signing it.[24]
In a statement made after the deal for Amazon passed the state House the Alliance for Main Street Fairness said, “Today’s vote in the South Carolina House of Representatives is just one step in the process, yet it’s unfortunate that the majority of the House favors special deals for one prospective retailer at the expense of our state’s existing employers and their 375,000 employees. The vote is particularly disappointing in light of dubious, last minute promises that certainly appear to have influenced some legislators to switch their vote. We’ll rally our troops and voice our concerns to the Senate where we hope they will come to a more fair and rational decision. The case against this special deal continues to grow on a daily basis."[25]
Main Street expressed strong disapproval of the South Carolina Senate's approval of this arrangement. In a press release Main Street said, “Nobody complained when Amazon was given free land, property tax cuts, job tax credits and a repeal of the limits on weekend sales. But in the end, this special exemption only passed after backroom deals and last-minute promises were made by Amazon officials – something which should disappoint everyone interested in transparency and good government."[26]
In 2010, Texas sent a demand letter for $269 million in sales taxes that the state argues should have been collected and remitted for sales to Texas customers. This dollar amount covers uncollected taxes from December 2005 to December 2009 and also includes penalties and interest. Texas authorities began an investigation of Amazon's tax status after a May 2008 report by The Dallas Morning News questioned why Amazon does not collect sales tax from Texas customers despite maintaining a distribution center in Irving near the Dallas/Fort Worth International Airport. Amazon argues that this distribution center, owned by Amazon.com KYDC LLC, located at the same address as Amazon's corporate headquarters in Seattle, is a legally separate entity and thus does not establish a physical presence in Texas that would require Amazon to collect sales taxes.[27] Amazon has decided to close a distribution center located in Irving in order to avoid future attempts by Texas to force the collection of sales taxes. 119 workers will lose their jobs when the facility closes.[28]
Texas Comptroller Susan Combs faced skeptical questions and criticism from members of the Texas Senate Finance Committee 16 February 2011 over her attempts to collect back sales tax from Amazon.com. Combs replied by saying that all businesses must obey the law "It is our belief that this is a very, very clear issue about nexus. As I say, this started probably because of catalog sales 47 years ago in 1963," said Combs. Combs also cited a Texas law to back up her argument that Amazon is required to collect sales taxes: "A retailer is engaged in business in this state if the retailer: 1.) maintains, occupies, or uses in this state permanently, temporarily, directly, indirectly or through a subsidiary or agent, however named, an office, place of distribution, sales or sample room or place, warehouse, storage place, or any other place of business.”[29] The Dallas Morning News published an editorial supporting Combs' efforts to collect sales tax from Amazon.com on 17 February 2011. The paper wrote, "It defies logic that a book bought online can elude sales tax while the same book bought in a bookstore can’t. A sales transaction is a sales transaction, and if one is taxed, why shouldn’t the other be taxed as well?"[30]
In March 2010 State Rep. Linda Harper-Brown filed House Bill 2719. House Bill 2719 would allow Amazon to avoid Texas sales tax by amending the state tax code to exempt companies or individuals from being classified as retailers or being ordered to provide state agencies with information on purchases made in Texas. if they make use of "only a fulfillment center...or computer server." House Bill 2719 is stands in sharp contrast to House Bill 2403, introduced by Rep. John Otto. House Bill 2403 would close loopholes in the Texas tax code that support Amazon's claim of being exempt from collecting sales tax. [31]
Legislation pushed by Rep. John Otto to require Amazon and other online retailers with a physical nexus in the state of Texas to collect and remit sales tax became law in 2011. The legislation deems any company with a store, distribution center, or other place of business in Texas as having a physical nexus there for the purpose of collecting sales tax. Otto said that Amazon contended that they did not need to collect the state sales tax because the company did not have a store front in the state and that a subsidiary owned their distribution center in Irving, Texas.[32]
Amazon attempted to avoid being required to collect Tennessee sales tax during negotiations with economic development officials to build two warehouses outside of Chattanooga. Amazon argues that its warehouses are not directly affiliated with the company and thus do not create a nexus that would require the collection of sales taxes. Tennessee revenue officials will not reveal any specific information on a deal with Amazon as they claim doing so would violate state confidentiality laws.[33]
A legal opinion by the state attorney general affirmed the constitutionality of a proposed bill in the state legislature that would require Amazon to collect sales tax on goods it ships to Tennessee residents. The opinion also stated that Amazon's construction of distribution centers in the state constitutes a physical nexus.[34]
According to study done by the University of Tennessee’s Center for Business and Economic Research, the Tennessee state government and local governments will lose about $410 million in tax revenue in 2011 due to online sales.[35]
Amazon is often able to overcome threats from state governments by cutting ties with local partners or leaving the state in question. Amazon severed its relationships with affiliates in Colorado due to efforts by the state government to collect sales tax on internet purchases. Amazon has threatened similar action against affiliates in Illinois over the same issue.[15] In February 2011, Amazon announced that it would be closing its Dallas, Texas distribution center over the sales-tax dispute.[36]
Amazon has created subsidiaries that are treated separately for tax matters, a legal technique called "entity isolation". The subsidiary that developed the Kindle is in California, but because it doesn't sell the Kindle directly to customers, Amazon's legal position is that it isn't required to collect sales taxes in California. In the company's financial report for the quarter ending September 30, 2009, the company stated that the imposition of sales-tax collection by more states or Congress could "decrease our future sales."[37]
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