For Amazon, stakes are high in sales tax fight
Amazon.com Inc. has insisted that California’s new law requiring it to collect sales taxes from customers in the state would hurt the company’s ability to compete in the nation’s biggest retail market.
Nevertheless, in New York, the company and other out-of-state, Internet-only retailers have paid $250 million in sales taxes over three years, thanks to a similar law that state adopted in 2008.
New York holds no special sway over the world’s largest online retailer. Amazon is following the state’s tax collection law, the first in the nation, for one reason only — so it can challenge the validity of the statute in court.
Elsewhere, it is fighting back ferociously. Last week, for instance, Amazon filed papers to seek a voter referendum to kill California’s 3-week-old law, and defied the state by saying it wouldn’t collect the taxes. On Monday, the state gave it the go-ahead to collect voter signatures to qualify the petition for the next election.
It was New York, though, that got the ball rolling nationwide.
Cash-strapped states are building on its law to try to find some way to end the free ride for out-of-state, Internet-only businesses. This year alone, six other states have enacted statutes to get online retailers to collect sales taxes, bringing the total to 11. And a measure in Texas awaits the governor’s signature.
They know they’ve been missing out on a lot of revenue.
A University of Tennessee study predicted that states would be unable to collect a combined $11.4 billion next year in unpaid online sales taxes and that California alone could be out $1.9 billion. Much of that may be uncollectible, but the state figures its new statute could recoup about $317 million in the first year.
Internet retailers have avoided the requirement that merchants collect sales taxes in the states in which they operate by citing a 1992 U.S. Supreme Court case. The nation’s high court ruled then that companies have to collect sales taxes only in states where they have a physical presence, such as workers, offices, stores or warehouses.
Seattle-based Amazon has maintained that it has that presence only in Washington, Kansas, Kentucky and North Dakota. It has put its warehouses and laboratories in other states under wholly owned subsidiaries of the company and denied that the buildings amount to a physical presence.
Amazon declined to comment for this story. But in financial documents filed this year, the company said that if even one state is successful in forcing it to collect sales taxes, it could “result in substantial tax liabilities for past sales, decrease our ability to compete with traditional retailers and otherwise harm our business.”
The New York measure was first quietly floated in a memo from the state Department of Taxation and Finance in late 2007, but after it faced enormous opposition, then-Gov. Eliot Spitzer killed it. A few months later, though, Spitzer revived the idea in a budget proposal that aimed to fill a $4.4-billion deficit and cope with the already slowing national economy.
Proponents argued, contrary to conventional wisdom at the time, that Amazon and other online retailers had a physical presence in the state through its network of in-state affiliate websites that are paid commissions for linking customers to online stores such as Amazon and Overstock.com.
“This method, which sought to directly expand the definition of physical presence, was new,” said Jonathan Ezor, a New York technology lawyer.
The plan appeared to be in jeopardy after Spitzer abruptly resigned because of a prostitution scandal, but New York retailers that already had to pay the sales tax lobbied to keep the language in the budget.
“It was just a question of fairness,” said James Sherin, president of the Retail Council of New York State. “We said all the in-state retailers that support the state are at a distinct competitive disadvantage to the online retailers who sell more easily to New York consumers because they don’t have to tack on the sales tax.”
Spitzer’s successor, Gov. David Paterson, signed the measure into law in May 2008. Within two days Amazon filed a lawsuit to seek a court order throwing the law out.
Both a trial court and an appeals court have said New York’s law is constitutional, but the appeals court said the lower court still needed to determine whether Amazon’s affiliates amount to a physical presence in the exact way the New York law defines it. The case is pending.
Susan Burns, a spokeswoman for the New York State Department of Taxation and Finance, said the state had collected $250 million in the first three years from the 35 online retailers that have complied, including Amazon. Even if Amazon eventually wins in court, Burns said, the money is “New York’s to keep” because the taxes came from customers, not Amazon.
A court decision in New York may not help California, Rhode Island, North Carolina and other states that have imitated New York’s law. Elsewhere in the nation, Amazon immediately severed ties with in-state affiliates as laws in those statutes took effect, an action aimed at eliminating a physical presence.
California crafted a broader law that requires out-of-state Internet retailers to collect sales taxes if other physical contacts within the state exist, such as a warehouse or a laboratory owned by an independent subsidiary of the company.
So even though Amazon cut off its 10,000 California affiliates before the law took effect July 1, it could still be required under the law to collect sales taxes because a subsidiary, Lab126, operates a facility in Cupertino that helped develop the Kindle electronic reader.
In Texas, the state comptroller, Susan Combs, decided that Amazon’s Dallas warehouse constituted a physical presence, so she sent the company a bill in February for $269 million in uncollected sales taxes from 2005 to 2009. The retailer is contesting it in an administrative hearing.
Colorado has tried a different strategy, asking Amazon to send the state records of all significant purchases made by Colorado residents. Amazon’s challenge to that law is the subject of a separate court case, and the law was held in abeyance until a decision there is rendered.
All the states’ efforts probably would be preempted if Congress created a national solution, something federal lawmakers have been avoiding for nearly two decades.
Sen. Dick Durbin (D-Ill.) has said he plans to introduce legislation soon. But political observers said Congress had little chance of passing such legislation given its other priorities.
In the meantime, neither the states nor Amazon appear to be backing down in the state-by-state turf war.
“It is literally week by week that we are seeing these new laws and Amazon’s new responses,” tech lawyer Ezor said.
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