Bloomberg News

Amazon Picks U.S. State Sales-Tax Winners Absent New Law

July 24, 2012

Amazon Picks U.S. State Sales-Tax Winners as Congress Stands Pat

An Amazon.com fulfillment center. Photographer: Joshua Lott/Bloomberg

When Texas sent Amazon.com Inc. (AMZN:US) a $269 million sales-tax bill in 2010, the world’s biggest online retailer shrugged. As lawmakers forced the issue last year, the company closed a warehouse near Dallas, cutting 119 jobs.

Until April, Texas stood with 39 other states that don’t get sales and use levies from Amazon for purchases made by their residents. By one estimate, that will mean more than $11 billion in potential revenue from Web merchants lost this year.

“Online is the fastest growth segment of the retail economy,” David French, senior vice president of government relations at the National Retail Federation, said by telephone. The lost revenue has “exasperated” governors, he said.

On April 27, that changed for Texas. The company and Comptroller Susan Combs, 67, announced that Amazon would start collecting sales taxes from customers in the state this month and invest $200 million to create 2,500 local jobs in four years. In ending the levy dispute for an undisclosed amount, Texas joined five other states that receive such remittances.

The accord followed a pattern for the company. Amazon has made peace with states such as New Jersey while laying out plans to create local shipping centers and jobs, a move that would require the collection of their sales levies anyway. The retailer plans to build 13 warehouses in 2012, after spending about $4.6 billion to increase the number by a third last year. Kerry Rice, a Needham & Co. analyst in San Francisco, said Amazon may be gearing up to accelerate deliveries in some areas.

Fox Smarts

“Amazon is smart like a fox,” said John Otto, a Republican state representative from Dayton, Texas, who led efforts on applying levies to sales by Web ventures last year. “The minute you put a physical presence in the state, you’re obligated to collect the tax.”

Under current law and a 1992 Supreme Court ruling, Web retailers only need to remit sales taxes to states where they have a physical presence. Seattle-based Amazon collects levies on sales to Washington state residents, as well as on transactions with customers in Texas, Kansas, Kentucky, New York and North Dakota, according to the company.

“We’re actively working with the states, retailers and Congress to get federal legislation passed,” Scott Stanzel, an Amazon spokesman, said by e-mail.

Judiciary Committee

Internet sales and use taxes were the focus of a hearing today before the Judiciary Committee in the U.S. House of Representatives. States have pressed Congress to act for years without results, and for a decade, Amazon has publicly backed changes in federal law that would ease Web sales-tax collection.

Committee Chairman Lamar Smith, a Texas Republican, said in an opening statement that the U.S. Constitution doesn’t allow one state to tax other states’ retailers. As a result, “online retailers, who maintain a very limited physical presence and use common carriers to fill orders, enjoy a competitive advantage over traditional retailers,” he said.

Smith said a bill, H.R. 3179, sponsored by Arkansas Republican Steve Womack, would replace the physical-presence rule with a requirement that state and local governments simplify their tax policies if they want to collect sales taxes from out-of-state retailers.

Tennessee Governor Bill Haslam, speaking on behalf of the National Governors Association, said more than $400 million in annual sales taxes go uncollected in his state under current law.

States’ Flexibility

“This is about states having the flexibility and authority to collect taxes that are already owed by their own in-state residents,” said Haslam, a Republican.

For governors and local lawmakers, deals that offer fresh revenue and jobs are hard to refuse. In 31 states, governors and legislatures closed deficits of $55 billion for the fiscal year that began this month, according to the Center on Budget and Policy Priorities in Washington.

Combs, a Republican, hasn’t said how much the state expects to get from Amazon’s collections on sales to Texans, and won’t say what if anything the company paid for the four years covered by the $269 million bill. That averaged $67.3 million annually. Amazon has said the settlement wouldn’t have a material impact.

Amazon, started as an online bookstore in 1995, reported $48 billion in 2011 sales, up 41 percent from the previous year. It offers 50 percent more items for sale than Wal-Mart Stores Inc. (WMT:US)’s Walmart.com site, Rice said, another driver of its need for more distribution space. Amazon also sells fulfillment services to other retailers.

Opponents’ Views

Organizations such as NetChoice, backed by EBay Inc. (EBAY:US), Oracle Corp. (ORCL:US) and Facebook Inc. (FB:US), say Amazon is trying to suppress competition from smaller online merchants by requiring them to comply with separate tax requirements in the 45 states that have sales and use levies. NetChoice says low-volume sellers won’t make much difference to state revenue. The Washington-based group says the 500 largest Web retailers account for 93 percent of unpaid levies.

States and cities won’t get $11.4 billion in taxes on online sales this year, according to a 2009 study by University of Tennessee economists William Fox and Donald Bruce, and LeAnn Luna, who teaches accounting at the school. U.S. online sales will reach $226 billion this year, according to Forrester Research Inc. (FORR:US) in Cambridge, Massachusetts.

Republican governors, including Nikki Haley of South Carolina and Rick Snyder of Michigan, are prodding Congress for a national solution, along with groups such as the National Conference of State Legislatures in Denver and the National Retail Federation in Washington.

States’ Rights

In Texas, Governor Rick Perry, a Republican who vetoed compliance bills aimed at Amazon last year, backs a solution that is “consistent across the country and that protects the rights of the states,” Josh Havens, a spokesman, said by e- mail.

Without a federal mandate, Amazon has been making agreements with states where it plans to expand. Last year, the company said it would spend $500 million on facilities and add 10,000 full-time jobs in California by December 2015, ending a fight against a state law that taxes online sales.

It will start remitting the levies in September if Congress doesn’t act, according to a statement from Governor Jerry Brown, a Democrat.

New Warehouses

New Jersey will receive as much as $40 million in annual revenue once Amazon begins charging state sales taxes in July 2013, Governor Chris Christie, a Republican, said May 30. An agreement with the company calls for $130 million in investment and the creation of 1,500 full-time jobs, he said. Work on a pair of new warehouses may begin next year.

Adding shipping centers near large metropolitan areas may help expand same-day delivery, according to Needham’s Rice. Amazon offers the service on some items in 10 cities, including New York, Chicago and Boston, yet not in California or Texas.

“Amazon has in a very smart way negotiated good deals with a number of states” on sales taxes to enable expansion, Anne Zybowski, a vice president at consulting firm Kantar Retail, said by telephone. “Customers want immediacy and convenience.”

To contact the reporter on this story: Kathy Warbelow in Austin at kwarbelow@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net


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