Research Institute Slams Amazon's Moves Against US Sales Tax

by Mike Godfrey, Tax-News.com, Washington

23 November 2009

Amazon's arguments against collecting sales tax in additional states are unconvincing, says the Center on Budget and Policy Priorities (CBPP), a Washington-based institute researching fiscal policy, in a study they have published.

In its 1992 Quill decision, the US Supreme Court ruled that businesses not "physically present" in a state need not collect and remit sales taxes on the state’s behalf because of the “burden” of complying with varying state sales tax rules. According to CBPP, Amazon claims to be protected by the Quill decision in numerous states despite the fact that its business practices diverge from both of the decision’s key parameters, namely:

• Amazon already has accepted responsibility for collecting and remitting sales taxes in all states but one on behalf of other companies that sell on its website, and
• Amazon – the business enterprise as a whole – has a physical presence in many states in which it claims sales tax immunity.

CBPP claims that Amazon's sales tax immunity in the vast majority of states enables it to enjoy an unfair 5-10% price advantage over local retailers, whilst also depriving states and localities of hundreds of millions of dollars of legally due revenue each year. Amazon’s major competitors – the web operations of companies like Barnes & Noble, Borders, Wal-Mart, and Best Buy – already collect sales tax in almost every state, says CBPP. CBPP argues that Amazon's competitive advantage drives Amazon’s opposition to legislative change.

Fair federal legislation that strikes an appropriate balance amongst the interests of states, Main Street businesses, and Internet and other interstate sellers remains the optimum solution to the interstate sales tax problem, says CBPP. Some 23 states have entered into the "Streamlined Sales Tax Agreement," which commits member states to revise their sales tax codes in order to ease sales tax compliance for interstate sellers like Amazon and would ease the way for federal legislation to require even Internet sellers to collect and remit sales taxes. CBPP claims that Amazon has helped stymie the enactment of the federal legislation for several years.

To achieve enactment of the legislation, the states have always been willing to include in it so-called small business "de minimis" language. This would provide that a business with total annual nationwide sales below a certain amount – USD5m has been proposed most often – would not be required to collect the sales tax in a state in which it lacked a physical presence, acknowledging that the smallest businesses could face difficulties in complying with sales taxes on a nationwide basis.

CBPP thinks Amazon’s position that a USD5m threshold is too high has encouraged Amazon’s competitor, eBay, to press its position that the threshold is too low. In 2005, the two companies’ opposing claims resulted in the introduction of two competing versions of the bill. Regardless of the explanation for Amazon’s opposition to a significant de minimis threshold for small businesses, it is clear that the effect of its opposition has been to splinter the coalition seeking the federal legislation and reduce chances for eventual enactment, says CBPP.

CBPP describes Amazon’s basic tax strategy as "entity isolation": placing various pieces of its overall business in individually incorporated subsidiaries and then contending that a subsidiary’s physical presence in a given state does not obligate Amazon to collect that state’s sales tax because the subsidiary does not sell merchandise directly to customers.

CBPP gives as example the Amazon subsidiary A-9, based in California, and responsible for the ongoing refinement of the search engine that customers use to find items on Amazon’s website – obviously a key asset for a company that sells 24 million different products. Likewise, Amazon subsidiary Lab 126, also based in California, developed the Kindle electronic book reader, which Amazon’s management hopes will be a major new profit center for the company. Amazon has three additional subsidiaries with locations in California. CBPP says Amazon does not collect state and local sales taxes on its sales into that state, evidently on the grounds that these subsidiaries "sell" their services to other parts of the company but do not sell merchandise to consumers.

Amazon uses the same basic approach to immunize its core business activity – selling and distributing products to its customers – from sales taxation, according to CBPP. To minimize the amount of inventory they have to manage, many Internet retailers buy a product from the manufacturers or wholesaler only after they receive an order for it and then have the latter ship it directly to the customer, never taking possession of the item themselves. Such drop shipments, which normally involve manufacturers and retailers that are completely independent of each other, sometimes escape sales taxation. According to CBPP, Amazon maintains that transactions fulfilled out of its own inventory in its own warehouses are drop shipments because the warehouse and the website that accepts the order are in nominally separate corporations. The Group has warehouses in six states in which it does not charge sales tax on its own sales: Arizona, Indiana, Nevada, Pennsylvania, Texas, and Virginia.

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