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Amazon, the Tax Bully

After years of fighting, the Internet giant learns to live with the online sales tax.
December 1, 2011 |
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Paul Misener, the vice president for global public policy at Amazon.com, appeared before members of Congress Wednesday to urge it to pass a proposed bill that would require online retailers — including Amazon itself — to collect state sales tax on the goods they sell through their websites.

“Congress should help address the states’ budget shortfalls without spending federal funds, by authorizing the states to require collection of the billions of revenue dollars already owed,” Misener said.

Currently, through a loophole created in 1992, online retailers that do not have physical stores in a state do not have to collect sales tax on the goods that they sell there. This sales tax loophole creates a loss of approximately $23 billion in uncollected state sales taxes every year. During tight budgetary years, state governments are now hungry to collect that money.

Whether Republican or Democratic, state governments have started duking it out with corporations such as Amazon, arguing that having a distribution warehouse in a state counts as having a “brick and mortar” presence there, thus requiring the company to pay sales tax. Recent congressional legislation, introduced by Reps. Steve Womack and Jackie Speier, known as the Marketplace Equality Act in the House, would allow states to opt into collecting sales tax from online retailers without the struggle. (A corresponding Senate bill has been introduced by Dick Durbin, Lamar Alexander and Mike Enzi.

Similar federal-level bills have been introduced in the past, but the new legislation is more flexible for states. The measure has garnered support from both Democrats and Republicans in a Congress that is usually bitterly divided on taxation issues. And Amazon, which was previously the ringleader among online retailers who uniformly opposed the previous bills, has unexpectedly decided to switch sides.  Amazon now supports the federal intervention it once opposed.

The reason for Amazon’s change of heart: the company knows it is fighting a losing battle. “They reached a point where they were fighting so many states — I think they realized that it was in their best interest to finally support a national solution rather than deal with 45 states coming at them from all different directions,” said Jason Brewer, a vice president at the Retail Industry Leaders Association, a group that represents Amazon’s rivals among the big box retailers such as Best Buy and Home Depot.

To Amazon’s chagrin, Texas, New York, Illinois, Tennessee, California and other states have already passed legislation requiring online retailers to pay sales tax. These struggles have not been easy. Often it was Paul Misener himself trying to protect Amazon’s favorite loophole. When Tennessee lawmakers tried to force Amazon.com to collect sales tax, Misener threatened to punish the state by closing its warehouses, costing Tennessee jobs. He eventually brokered an agreement where Tennessee would delay action until 2012 in exchange for Amazon opening two new warehouses that would create 1,200 full-time and 2,000 seasonal jobs.

In California, when Gov. Jerry Brown signed a deal to make the company pay sales tax, Amazon threatened a ballot referendum and gathered over $5 million for signature-gathering to back it up — despite the fact that the R&D lab that created the Amazon Kindle is located in Cupertino, California. Amazon eventually conceded, and agreed to abandon the ballot initiative–in exchange for a delay in the state implementing the new law.

Patrick Byrne, chairman and CEO of Overstock.com, sparred with Misener at the hearing. “Our tax accountants have never let me try something that aggressive,” he said of Amazon’s previous insistence on not paying taxes on goods, even in states where the company has physical offices and warehouses.

Amazon and other online retailers have had good reason to try to keep the loophole open in the past. The loophole gives them  an advantage over their competitors, such as WalMart and Best Buy, that have physical stores in addition to online ones. They have must pay state sales taxes on all goods, even those purchased online.

WalMart, Best Buy, Home Depot and others have clearly felt the sting of Amazon’s success and have fought back in recent years. They established the Alliance for Main Street Fairness to work “to close the anti-small business sales tax loophole,” that is, the online sales tax exemption. Through this organization, WalMart and others take advantage of a momentary alliance between giant corporations and mom-and-pop stores. As the saying goes, the enemy’s enemy is your friend — and right now everyone’s enemy is Amazon.

Amazon seems to have recognized that its attempts to bully states are no longer working. Now the company is adapting its position fast. Amazon is good at adapting. Started as an online bookseller, Amazon has grown with the Internet, now selling everything from lawnmowers to wedding rings. When book sales plummeted, Amazon produced the Kindle, a low-price tablet where buyers can purchase digital books from Amazon with a single click. As the online marketplace grew massive, Amazon created its successful Prime service, which gives customers free shipping, for an annual $79 fee. Amazon actually loses $11 per customer annually on Prime, but it creates valuable consumer loyalty in the process.

Amazon displayed similar craftiness in front of Congress yesterday. Rather than continuing to fight a losing battle over sales tax in the states, Amazon flipped its position, and now the company will avoid fighting state-by-state battles that it would have lost eventually.

And in defeat, Amazon is already looking for ways to win. In early November, the company announced that it will roll out a new service early next year that will collect sales tax on behalf of its Amazon Marketplace vendors, the hundreds of thousands of businesses that sell their goods through Amazon.com. Amazon plans on collecting a 2.9 percent surcharge for acting as the sales tax calculator and collector, a fee that will presumably either get passed on to the vendor or the consumer.Rather than being hit by new sales tax regulations, the company is now using the regulations to profit.

Amazon remains a bully, and a very agile one at that.