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A proposal in the U.S. Senate aims to end the longtime exemption for e-commerce
California visitors to Wal-Mart Stores' (WMT) website must pay $214 to buy a Philips Electronics (PHG) 22-inch LCD HDTV, one of the hottest-selling flat-panel televisions on the Web. Customers of Amazon.com (AMZN) in that state see a price of $194 for the same product. The discrepancy stems largely from something that dates back to Julius Caesar: sales tax. Wal-Mart, with about 100 stores in California, has to collect it. Amazon, with no stores in California—or anywhere else, for that matter—does not.
There's a growing sense among state and federal lawmakers that the online sales-tax reprieve, once meant to support and nurture a fledgling industry, constitutes an advantage that Amazon, with 90 million customers and $34 billion in annual sales, no longer needs. Over the past year an escalating war over online sales taxes has spread to Texas, Connecticut, California, and dozens of other states. Later this month the battle will reach Capitol Hill. Senate Majority Whip Dick Durbin (D-Ill.) says he plans to introduce a bill, called the Main Street Fairness Act, mandating that all businesses collect the sales tax in the state where the consumer resides.
Such measures have been proposed and disregarded by Congress for years, but Durbin believes the winds are shifting. "This idea is overdue," he says. "Online retail sales are now very fulsome and are growing at the expense of local units of government." Many state budgets are bleeding red, despite some recent revenue upswings around the country, and Internet sales-tax revenue has the gleam of found money. In many states, customers are supposed to declare their online purchases on their income tax forms but rarely do. A University of Tennessee study recently estimated that states will collectively lose $10.1 billion in uncollected online sales-tax revenue this year and $11.3 billion next year.
Amazon executives have long argued that state laws requiring it to collect sales tax violate Supreme Court rulings from 1967 and 1992, which stipulate that only retailers with a physical presence, or "nexus," in a state need do so. Surprisingly, Jeffrey P. Bezos, Amazon's founder and chief executive officer, recently told Consumer Reports that he supports federal legislation that rationalizes the patchwork of 30,000 state and local sales-tax jurisdictions around the country, each with its own rules and administrative quirks. Amazon declined to comment on Durbin's proposed bill.
Amazon's actions on the state level have spoken much louder than its words in support of a national solution. The company has fought state-by-state collection efforts, deploying both carrot and stick to hit politicians where they feel it most—jobs. In Texas, when the legislature passed a bill that would force online retailers with distribution facilities in the state to collect sales tax, Amazon announced it would close its shipping center outside Dallas, fire hundreds of local workers, and scrap plans to build other facilities in the state. On May 30, Texas Governor Rick Perry vetoed the bill.
In South Carolina, Amazon won an exemption on a new sales-tax law after threatening to pull its distribution center from the state and agreeing to send customers e-mails reminding them to pay the tax on their own— messages that are likely to be cheerfully ignored. On May 18 in Tennessee, legislators said they would delay considering until next year a bill that would tax online purchases. They were either spooked by Amazon's threat to move its two state distribution centers to Indiana or enticed by its new promise to evaluate locations for up to three additional centers.
Despite the beating they've taken in these states, Amazon's opponents contend that time is on their side. "Ultimately, this is a battle they are going to lose, and this is about how long they can push off that day of reckoning," says Jason Brewer, vice-president for communications and advocacy for the Retail Industry Leaders Assn., which counts among its ranks Wal-Mart, Best Buy (BBY), and Target (TGT). They also question Bezos's professed support of a federal law. "They always claimed to support a federal solution, but they've never lifted a finger to get there," Brewer says.
Whether Congress backs a federal approach is an open question. Hill watchers believe Durbin may have a hard time garnering support for his proposal, in part because it could too easily be interpreted by voters as a new tax. "It's long been an issue the Republicans weren't interested in, and given that they're in control of the House, I don't see it going anywhere," says Pam Olson, a tax attorney at the law firm Skadden, Arps, Slate, Meagher & Flom and former Assistant Secretary for Tax Policy at the Treasury Dept.
Durbin, though, believes all those former mayors and governors now residing in Washington will weigh the budget problems back home and coalesce around the idea of a national Internet tax standard. "Doing it state by state gives the Internet companies an opportunity to go shopping, to find the state that is going to treat them the best," he says. "It certainly argues for a federal approach."
Actually, being forced to collect sales tax may not turn out to be so bad for Amazon. Analysts at Wells Fargo Securities (WFC) recently surveyed a range of products and found that even without factoring in sales tax, Amazon's prices were, on average, 5 to 6 percent lower than Wal-Mart's and 12 to 13 percent below Target's. And without having to worry about sales-tax consequences, Amazon will be able to freely add shipping centers near every major city and accelerate its push toward delivering products overnight, or even on the day they're ordered. "Each year that passes, the relevance of sales tax to Amazon's success is less and less," says Morgan Stanley (MS) analyst Scott Devitt, who notes that the company keeps getting more efficient as it gets larger. "If you look five years out, when there's probably a policy in place, it's possible Amazon will be better off for it. That's not something I would have said before."
The bottom line: Losing its sales-tax exemption may not hurt Amazon. Even without factoring in taxes, it beats Target and Wal-Mart on price.