Amazon Tax

Amazon tax has been criticized for collecting sales taxes from customers in only the five states it has a major presence in. Several states have passed or are considering ‘Amazon tax‘ laws designed to compel Amazon to collect local sales and use taxes from customers. The U.S. has no federal sales tax. In most countries where Amazon operates, a sales tax or value added (consumption) tax is uniform throughout the country, and Amazon is obliged to collect it from all customers.

Proponents argue that Amazon has a comparative advantage over brick-and-mortar retailers, and the online company is under increasing legal and political pressure from state governments, traditional retailers and other groups because of its refusal to collect sales tax in 40 of the 45 states with a statewide sales tax. Those 40 states include at least 12 where Amazon has a clear physical presence via distribution centers and wholly owned subsidiaries.

Amazon is often able to overcome threats from state governments by cutting ties with local partners or leaving the state in question. Amazon severed its relationships with affiliates in Colorado due to efforts by the state government to collect sales tax on internet purchases. Amazon has threatened similar action against affiliates in Illinois over the same issue. In February 2011, Amazon announced that it would be closing its Dallas, Texas distribution center over the sales-tax dispute. Amazon has created subsidiaries that are treated separately for tax matters, a legal technique called ‘entity isolation.’ The subsidiary that developed the Kindle is in California, but because it doesn’t sell the Kindle directly to customers, Amazon’s legal position is that it isn’t required to collect sales taxes in California.

Amazon says it would support a federal solution to the sales tax problem as long as such legislation was fair and simple. As of May 2011 legislation has been introduced in Congress to allow states to impose sales taxes on sales to their residents from out-of-state. Amazon has not stated a public position on the bill. Amazon’s competitors say it is insincere. Similar legislation, called the ‘Main Street Fairness Act,’ failed in committee in 2010. Several earlier versions of the bill also failed to advance. Amazon lobbyists met four times with members of Congress or their aides in 2010 regarding the act. The company spent $610,000 on lobbying in 2010, although these expenses also covered other bills discussed at the same time. Amazon has increased political contributions to federal lawmakers. Amazon’s political action committee spent $214,000 during the 2010 election cycle, double what it spent for the 2008 elections.

In California, Rep. Nancy Skinner pushed legislation to tax online sales that was approved in 2009 as part of the state budget. Gov. Arnold Schwarzenegger vetoed the legislation. In 2011, Skinner introduced similar legislation that later became law. The bill required out-of-state online sellers with affiliates in California to collect sales tax on purchases made by state residents. The affiliate provision was included to ensure that only sellers with a California nexus are taxed, as required by federal law. Amazon threatened to terminate roughly 10,000 of its affiliates located in California if legislation pending in the state legislature to deem such affiliates as constituting a nexus that requires the collection of sales tax is passed. California affiliates would no longer receive commissions on referrals to Amazon. Four bills pending in the state legislature would define the use of associates located in California-* for sales referrals as activity subject to taxation by California. In a letter addressed to California’s Board of Equalization, the agency responsible for collecting sales taxes, Amazon called such legislation ‘unconstitutional’ and said it would terminate its California affiliates if passed.

In July 2011, Amazon made good on its promises to terminate California affiliates. According to the Performance Marketing Association, there were 25,000 Amazon affiliates based in California. However, On Amazon’s website, under ‘United States Subsidiaries,’ listed are only four California locations: A2Z Development Center Inc. – ‘an innovative customer-centric software development company’ – in San Francisco and Cupertino, where the Kindle was designed; a search engine company called in Palo Alto; and, in San Francisco, Alexa Internet, another Amazon search company. Due to its opposition to rules that would require the company to collect sales tax is facing a boycott from a coalition of California non-profits. One of the groups behind the boycott, ‘Think Before You Click CA,’ says improved sales tax enforcement will bring in $200 million per year in additional revenue and encourage people to shop at local traditional retailers instead of online.

In response to resistance from, other online retailers, and anti-tax groups the State of California agreed to delay of one year before requiring online retailers to begin collecting sales tax on sales to California addresses. In return for the one year delay from California says it will create 10,000 full-time jobs, 25,000 seasonal jobs, invest $500 million in various facilities in California over the next few years, and begin remitting sales taxes on orders shipped to California. Amazon is seeking ‘a lasting partnership with the state,’ said Amazon Vice President Paul Misener. Amazon said it will reinstate their California affiliates as early as this week in response to California temporarily repealing its sales tax law.

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