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Amazon's escalating battle with several cash-strapped states over collecting sales tax on web purchases is yet another example of technology -- and particularly internet commerce -- outpacing U.S. law. And the dispute shows no signs of a resolution any time soon.
At issue is the ability of e-commerce companies like giant online retailer Amazon to avoid collecting state sales taxes thanks to a landmark 1992 Supreme Court decision (Quill Corporation v. North Dakota), in which the court said that states cannot require vendors to collect such taxes if they do not have a physical presence in the state. Quill was decided before e-commerce became common, and was meant to address mail-order companies that do not have in-state storefronts.
With states across the country facing drastic budget shortfalls, officials are trying to capture billions of dollars in uncollected sales taxes they say Amazon should be collecting and remitting to the states. But as long as Quill remains on the books, the states are going to encounter fierce resistance from the company.
"The ultimate solution for the states is to get the Supreme Court to overturn that precedent, because that decision was really designed for a different economy and a different time, pre-internet," David Brunori, executive editor of Tax Analysts and an expert in state tax law, told Wired.com. "Barring that, we're going to see many years of states looking for loopholes as they go after these internet companies to try to force them to collect the tax."
At present, Amazon only collects sales taxes in a small number of states, including Washington, where the company is based. Naturally, Amazon is fiercely guarding its ability to avoid collecting taxes in most states, because that ability gives it a competitive advantage in the marketplace.
Now, 19 years after Quill, several large states, including California, Texas and Illinois have begun asserting that Amazon does, in fact, maintain an in-state physical presence, either through distribution centers, or so-called "affiliates," which are in-state organizations that partner with Amazon. New York has been making this argument for years.
"Amazon will go to a boy scout troop in the Bronx and say, 'You want to raise some money? Have people buy stuff through Amazon.com, using a code, and we'll kick some percentage of the sale back to your Boy Scout troop,'" said Brunori. "Amazon was doing this very successfully around the country, because it was a great method of market penetration."
"What the states said was, 'That's just like having a physical presence in the state.' And Amazon said, 'Well, no not really,'" Brunori continued. "This has not been decided from a legal perspective, and most people think it will ultimately wind up in the Supreme Court."
For its part, Amazon is vigorously resisting the states' efforts, arguing that because the distribution centers are owned by subsidiaries, they don't qualify as an in-state presence for Amazon itself. And the affiliates are separate entities from Amazon, the company said.
The company has gone so far as to threaten to close distribution centers and sever affiliate relationships. Last fall, the Texas state comptroller slapped Amazon with a $269 million tax bill over a distribution center in Dallas.
In response, Amazon said it would close the facility and squash plans to build a new one, citing "an unfavorable regulatory climate." (Is that how Texas defines "pro-business"? By taxing companies out of the state?)
Texas Gov. Rick Perry was not amused, publicly breaking with state Comptroller Susan Combs.
"We don't want to be onerous on tax policy ... and I would say I'm having a hard time getting my hands around this one," Perry told the Washington Examiner. "Texas doesn't need to make itself less competitive with its tax decisions."
Just last week, Illinois Gov. Pat Quinn signed a bill requiring Amazon to collect and remit sales taxes in order to "level the playing field and protect jobs for Illinois brick-and-mortar businesses."
And in California, there are several bills pending aimed at forcing Amazon to collect sales tax.
Amazon did not return a request for comment. But in a blistering letter to California officials (.pdf), Paul Misener, Amazon VP for global public policy, called the measures unconstitutional and warned that they could actually have adverse consequences for the state budget.
"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,'" Misener wrote. "Ironically, California’s general fund could suffer a net loss in revenue as affiliates pay less income tax or move out of the state."
In short, it's a big mess. And we're talking about real money here. Sales taxes account for one-third of the $270 billion that states collect annually, according to Brunori.
So what's the solution?
Over the last decade, there's been a growing movement around the Streamlined Sales Tax project to bring uniformity and clarity to state tax laws across the country. But there's a rub: thanks to the Supreme Court's Quill decision, "until Congress acts, states cannot currently require sellers to collect and remit sales tax unless the seller has a physical presence in the state," according to the Streamlined Sales Tax project.
"I think it is a great idea, but it's very unlikely to come to fruition because it's been going on for 10 years and they're no closer today than they were five years ago to making this work," Brunori said.
Furthermore, in the current political climate, given the current leadership of Congress, it is highly unlikely the lawmakers will go anywhere near anything that has the words "tax" involved.
"There's really no incentive for any member of Congress to put out a bill saying, 'Hey, let's make everybody subject to internet sales tax,'" Brunori said. "They'll never do it. It's not going to happen."
See Also:
- Amazon Prepares to Take On Illinois in Sales Tax Dispute
- Amazon Objects! Calls N.Y. State 'Amazon Tax' Unconstitutional
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