If this saying holds true, Amazon.com and other out-of-state online retailers may soon have to start collecting state sales taxes. California lawmakers this weekend approved a compromise bill (AB 155) with Amazon under which the online retail giant dropped its bid to overturn a state law passed earlier this year that required it to begin collecting sales tax in July 2011. In return, Amazon was given a reprieve until September 2012. The delay gives Amazon and other e-tailers time to lobby Congress for national rules governing Internet sales tax collection.
California is one of several states, including Texas, Illinois and Connecticut, seeking to force Internet retailers to collect sales taxes on purchases made by residents of their states. Amazon has argued that if it does not have a “physical presence” in a state it should not have to collect sales tax there. Just what constitutes a physical presence is a point of contention. Amazon has claimed that neither its fulfillment center near Dallas (see previous post), nor its subsidiary in Silicon Valley or affiliates in California constitute a physical presence. To avoid collecting sales tax, Amazon cut its ties to its affiliates in the Golden State, and in some other states as well. Under the compromise reached this weekend, Amazon agreed to resume working with its California affiliates.
Readers of Bizmology know that Amazon’s sales-tax-exempt status has come under fire as states facing severe budget shortfalls search for new sources of revenue. Indeed, as cash-strapped states become increasingly desperate for revenue, they’ve turned up the heat on Amazon and its online retail kin. Also, bricks-and-mortar stores — including the world’s largest retailers Wal-Mart Stores — have been complaining about Amazon’s “unfair” tax advantage for years and have lobbied for laws to create a level playing field between traditional retailers and out-of-state online sellers.
Amazon spun the compromise as a “win-win” for California and itself. In return for a 1-year reprieve and the elimination of an estimated $200 million in sales tax owed under the law passed earlier this year, it promises to bring thousands of jobs and hundreds of millions of investment dollars to California.
The deal sets the stage for a reexamination of a 1992 U.S. Supreme Court decision that said retailers only have to collect state tax if they have a physical presence in a state. That ruling, which predated the founding of Amazon by two years, involved a mail-order company. Clearly, we’re living in a vastly different world. The 1992 ruling, which Amazon has used to justify not collecting sales tax, should be reexamined. With billions of dollars in uncollected tax at stake, the battle to level the playing field (or not) for traditional and online retailers should be an interesting one. Stay tuned.