Texas Hold 'Em: Amazon and Lone Star State Reach Sales Tax Deal

If they had actually been playing poker, it would probably have been akin to Texas Hold 'Em.

Both sides wanted to win - and both were bluffing. One caved. And the result is that Amazon's national tax advantage is quickly going to be history.

The issue was, once again - with feeling - that Amazon, now the nation's largest e-retailer with 20% of sales, has refused to collect state and local taxes, claiming it is exempt due to its online provenance. The state and local authorities, eying empty store fronts, disappearing jobs and declining tax revenues think this has gone too far.

Physical retailers, who pay taxes, contribute to the local community and hire local local citizens understandably think Amazon's status is unfair. Especially since the favorable tax treatment was enacted when the net was in its infancy and no one knew how it would come to dominate commercial activity.

The stakes in this stand-off were large. Amazon closed a distribution center with hundreds of jobs in Ft. Worth, Texas while Texas threatened to shut Amazon's sales down in the second largest state of the union. Both had something of significance to lose.

But it was Amazon who folded. The reasons were probably similar to those that caused it to cave in the five other states with which it has reached agreement: ultimately, Amazon makes money by selling. It no longer really needs the tax advantage. That may provide some modest profit enhancement, but they have won the convenience battle with consumers. Other retailers are and will continue to develop an online presence but it is unlikely that any will achieve Amazon's scale anytime soon.

This particular deal has garnered a lot of attention because it IS significant. Three of the other states where it collects taxes are relatively small and do not make much of an impact on sales or profits. Seattle, Washington is where the company is headquartered, so the arguments it used in other venues were irrelevant there. New York is very big, has a powerful retailer industry - and is famously liberal in its politics. Texas, by comparison, is not only large but is both the most politically conservative and business friendly in the US. It had to decide between its pro-business, anti-tax ethos and the fact that home-state constituents were placed at an economic disadvantage. The fact that all politics is local proved more powerful than ideology. With the example of Texas before them, the other 42 states are almost certain to follow quickly.

Amazon's tax advantage is history. JL

Nanette Byrnes reports in Reuters:

Amazon.com agreed to begin collecting sales tax in Texas on Friday, forging a deal that promises to bring more jobs to the southern U.S. state and as the online marketer lost another round in a series of state-by-state sales tax battles.

Amazon rings up an estimated 20 percent of all U.S. online retail sales, making it the country's largest online retailer. Most online purchases are free of sales tax, which has given the company an edge over traditional, bricks-and-mortar retailers that do collect sales tax.
The agreement, to take effect on July 1 for Texas' 6.25-percent sales tax, follows another accord reached with Nevada earlier in the week to begin collecting that state's 8.1 percent sales tax on January 1, 2014.

As online sales have grown, and municipal budgets have tightened, states have been pushing hard to capture more e-tail sales tax revenue.

Under federal law, retailers with physical facilities in a state can be forced by the state to collect sales tax on purchases made by a resident of that state. That includes e-tailers with distribution centers. E-tailers without physical facilities in a state need not collect the tax.

BEST TAX TERMS

As Amazon has grown, it has needed more distribution facilities, and in the past few years has parlayed the promise of new facilities in exchange for the best tax terms possible with states across the country.

The importance of that advantage was clear when Amazon pulled up stakes in Texas last fall, shutting down its distribution hub at the Dallas-Fort Worth airport after Texas State Comptroller Susan Combs sent Amazon a $269 million bill covering sales taxes it did not collect from 2005 to 2009.

In exchange for Amazon's promise to collect future taxes, create at least 2,500 jobs and make at least $200 million in capital investments in the Lone Star state, Combs is dropping the demand for back taxes.

Texas will bring to six the number of states where Amazon currently collects sales tax.

According to its website, it already collects sales tax in five of the 50 states -- Kansas, Kentucky, New York, North Dakota and Washington -- on purchases made by people who live in those states. Those are the five states where it has physical facilities or affiliated sellers and no agreement with state governments exempting Amazon from collecting sales tax.

A comprehensive federal solution to the question of which companies must collect sales tax on online purchases has yet to reach a vote in Congress.

In announcing the deal with Texas, Amazon's Vice President of Global Public Policy, Paul Misener reiterated the company's support for a national solution.

On Thursday, Amazon reported net sales of $13.18 billion for the first quarter of 2012, up 34 percent from the same quarter last year, with net income of $130 million.