Amazon’s Arguments Against Collecting Sales Taxes Do Not Withstand Scrutiny
End Notes
[1] Amazon charges sales tax on sales of its own merchandise in 5 states — its headquarters state of Washington, Kansas, Kentucky, North Dakota, and (as a result of the enactment of the “Amazon law”) New York. For a description of the states in which Amazon collects sales taxes, see: http://www.amazon.com/gp/help/customer/display.html?ie=UTF8&nodeId=468512&qid=1245865150&sr=1-1 .
[2] See: Donald Bruce, William F. Fox, and LeAnn Luna, “State and Local Government Sales Tax Revenue Losses from Electronic Commerce,” April 13, 2009; http://www.streamlinedsalestax.org/uploads/downloads/EC%20Executive%20Committee%20Meeting%20Docs/SSTP%20e-commerce%202009%20REV041309.pdf .
[3] Technically, the tax that is due on an interstate sale is an equivalent “use tax” rather than the sales tax. This is true regardless of whether the use tax is collected by the seller or self-remitted by the purchaser. Nonetheless, as is common, this report will refer to the collection of “sales taxes.”
[4] See: Michael Mazerov, “New York’s Amazon Law: An Important Tool for Collecting Sales Taxes Owed on Internet Sales,” Center on Budget and Policy Priorities, July 23, 2009; https://www.cbpp.org/cms/index.cfm?fa=view&id=2876.
[5] Rhode Island and North Carolina have also enacted versions of New York’s law. The California and Hawaii legislatures also approved such laws, but these were vetoed by the states’ governors and the vetoes were not overridden.
[6] Amazon’s Securities and Exchange Commission Form 10-K for the year ended December 31, 2008 states (page 16): “We lease our corporate headquarters in Seattle, Washington. We also lease additional corporate office, fulfillment and warehouse operations, customer service, and other facilities throughout the United States, principally in Arizona, California, Delaware, Florida, Indiana, Kansas, Kentucky, Michigan, Nevada, New Hampshire, New Jersey, North Dakota, Pennsylvania, South Carolina, Texas, Virginia, Washington, West Virginia, and Wisconsin.” (Among the 19 listed states, Delaware and New Hampshire do not levy sales taxes.) Since the text states that Amazon leases facilities “principally” in those states, it may have facilities in additional states. Indeed, Amazon’s job listing site, at http://www.amazon.com/Search-Jobs-Careers/b/ref=amb_link_6001432_2?ie=UTF8&node=239362011&pf_rd_m=ATVPDKIKX0DER&pf_rd_s=center-2&pf_rd_r=19M20ATH597S40TBKY4P&pf_rd_t=101&pf_rd_p=434481001&pf_rd_i=203348011 is equipped to list job openings at Amazon subsidiaries in Georgia and New York in addition to those identified in its 10-K:.
[7] Mickey Alam Khan, “Booksellers Group: E-Retailers Should Collect Sales Tax,” DM News.com, September 28, 1999.
[8] Quoted in Karen Setze, “Education Seen as Key to Streamlined Sales Tax Project’s Success,” State Tax Notes, August 22, 2001. In addition, Amazon Vice President Paul Misener told a congressional hearing in 2006: “We’ve known all along that . . . we don’t need a sales tax price advantage to do very well with respect to our competition.” Testimony to a hearing of the Subcommittee on Regulatory Reform and Oversight, House Committee on Small Business, “The Internet Sales Tax: Headaches Ahead for Small Business?” February 8, 2006.
[9] William C. Taylor, “Who’s Writing the Book on Web Business,” Fast Company, October/November 1996.
[10] As discussed below, Amazon now has five subsidiaries in California that have developed key assets of the corporation, yet still does not charge sales tax on its California sales.
[11] Amazon.com, Inc. Form 10-K for the year ended December 31, 2008, p. 14.
[12] Louis Navellier, “All-American Stock #2: Amazon,” Blogging Stocks website, July 4, 2009, www.bloggingstocks.com/2009/07/04/all-american-stock-2-amazon-amzn/ .
[13] Andrea James, “Bezos: Sales Tax Is Horrendously Complicated,” Amazon & the Online Retail Blog of the Seattle Post-Intelligencer, June 30, 2008; blog.seattlepi.com/amazon/archives/142371.asp. Similarly, in 1999, a company spokesperson complained: “States don’t tax the same things; even within localities the tax rates are different. And the burden on any company to figure out what’s taxable at which street address is overwhelming.” Amazon spokesman Bill Curry quoted in Jim Morrill, “Bill Targets Sales Tax from Net Shoppers,” Charlotte Observer, June 20, 1999.
[14] See the source cited in note 1.
[15] Macy’s customer information section of Amazon’s site states: “Applicable sales tax will be added for merchandise shipped to states in which we have a legal obligation to collect sales tax.”
http://www.amazon.com/gp/help/seller/shipping.html/ref=ms_mhelp_ship?ie=UTF8&seller=A2HLK9C2IWJJB7#tax . That is vague, but when Macy makes sales from its own site it concedes that it must collect sales tax on its online sales in all states in which it has a Macy’s store. In all likelihood, it is doing the same with respect to sales made via Amazon’s website.
[16] Testimony of Richard Prem, Amazon.com Vice President for Indirect Taxes and Tax Reporting, to a hearing of the California Board of Equalization, July 8, 2008. The audio feed of this hearing is archived at www.visualwebcaster.com/event.asp?id=49383 (hereafter “Prem testimony”). Prem’s statement regarding Amazon’s collection of sales tax on behalf of Eddie Bauer appears at approximately 1:21 into the recording.
[17] Prem testimony at approximately 1:14. Prem did not indicate whether this count includes independent merchants located outside the United States on whose behalf Amazon is calculating and collecting “value-added taxes,” the foreign analog of state retail sales taxes.
[18] It seems unlikely that Amazon would offer sales tax collection services at a loss, and much more likely that it charges enough for the service to make at least some profit.
[19] “In accordance with the laws governing members of the European Union, Amazon.com.uk is obliged to charge VAT on all orders delivered to destinations in member countries of the EU. In general, VAT is charged in accordance with the local legislation in each member state.” http://www.amazon.co.uk/gp/help/customer/display.html?nodeId=502576 .
[20] More generally, of course, Amazon is one of the most technologically sophisticated companies in the world. According to the Prem testimony: “I think many people think of us just as a bookseller but really we’re a technology company and we’re about enabling technology.” Prem went on to state the following: the company sells 24 million different items to 70 million different customers; 35 percent of the items sold on its website are sold by 1 million independent merchants whose sites Amazon powers or on whose behalf Amazon bills purchasers and/or actually fulfills orders from its own warehouses; and the company employs over 4,000 software development engineers and 15 Ph.D.s in mathematics. Amazon has also developed a propriety search engine to search its site for all the items it sells and built a huge database that allows users to search for text within hundreds of thousands if not millions of individual books. In sum, the claim that collecting and remitting sales taxes on its own retail sales for every state and locality would represent a significant burden for the company would be difficult to take seriously — even if the company were not already performing these tasks on behalf of Target.com and 5,000 third-party sellers. As a technology blogger for the New York Times wrote: “When you look at all the things Amazon does every day — such as the recommendations it offers about goods to buy, or the way it optimizes its warehouse operations — figuring out sales tax looks like a job for the summer intern.” Saul Hansell, “Amazon Plays Dumb in Internet Sales Tax Debate,” New York Times “Bits” blog, February 13, 2008; bits.blogs.nytimes.com/2008/02/13/amazon-plays-dumb-in-internet-sales-tax-debate/?pagemode=print .
[21] Many companies — the Sears mail order catalog operation, for example — have been legally obligated for decades to charge sales tax in numerous states or every state. Thus, a number of companies specialize in providing and maintaining computer software that substantially automates sales/use tax compliance. Probably the best-known providers are Vertex, Inc. and Taxware International (acquired several years ago by the ADP payroll-processing firm). A press release issued by Sabrix, Inc. on August 5, 2009 revealed that Amazon uses the company’s “Sabrix Application Suite [which] seamlessly connects to all financial applications requiring the determination, calculation, and recording of transaction taxes.”
[22] Associated Press, “Bezos to Booksellers: No New Sales Taxes,” June 2, 2000. Bezos made the same argument in 2008, telling a stockholder meeting: “We’re not actually benefiting from any services that those states provide locally, so it’s not fair that we should be obligated to be their tax collection agent since we’re not getting any of the services.” Andrea James, “Bezos: Sales Tax Is Horrendously Complicated,” Amazon & the Online Retail Blog of the Seattle Post-Intelligencer, June 30, 2008; blog.seattlepi.com/amazon/archives/142371.asp.
[23] See the sources cited in notes 1 and 6.
[24] In the Quill decision, the Supreme Court explicitly rejected the argument that non-physically-present sellers do not benefit sufficiently from services provided by their customer’s states to be fairly required to charge sales tax in those states. The Court wrote: “[T]here is no question that Quill [Corporation] has purposefully directed its activities at North Dakota residents . . . and that the . . . tax is related to the benefits Quill receives from the State.” The basis of the Court’s upholding of a “physical presence” test in Quill was a desire to shelter interstate commerce from excessive sales tax compliance burdens, not a belief that requiring out-of-state retailers to collect sales tax would be unfair to them.
[25] U.S. Census Bureau data, www.census.gov/compendia/statab/2010/tables/10s0222.pdf.
[26] According to the most recent data available from the U.S. Census Bureau, state and local sales and use taxes supplied 23 percent of all state and local tax receipts and 16 percent of all state and local revenues from their own resources in 2007. K-12 education accounted for 23 percent of all state and local government spending in the same year.
[27] As discussed above, the fact that Amazon charges all applicable value-added taxes on its sales in foreign countries is further evidence that it could comply with sales taxes in every state relatively easily if compelled to do so. It may raise a question, however, as to why Amazon complies with VATs. The answer, quite simply, is that those countries’ tax laws say it has to; there are no foreign analogs of the Quill decision to immunize the company from VAT-collection obligations. Amazon complies with applicable tax law when its legal obligations are clear, as indicated by the fact that it chose to comply with New York’s affiliate nexus law rather than flout it.
[28] See: www.a9.com/-/company/.
[29] See: www.lab126.com/.
[30] See: http://www.amazon.com/Locations-Careers/b/ref=amb_link_5763692_4?ie=UTF8&node=239366011&pf_rd_m=ATVPDKIKX0DER&pf_rd_s=left-4&pf_rd_r=0XT9F1QBKX7KR8HWSETG&pf_rd_t=101&pf_rd_p=465323071&pf_rd_i=203348011 .
[31] The courts have granted states some legal authority to ignore the division of a corporation into separate subsidiaries in order to prevent state corporate income tax avoidance. The courts have done this by authorizing a state corporate tax practice known as “combined reporting,” which effectively treats in-state and out-of-state subsidiaries as one corporation for purposes of calculating the tax. Some commentators argue that the same legal theory that underlies the authorization of combined reporting supports state action to require an out-of-state Internet retailer to charge sales tax in a state in which a related subsidiary is physically present. (See: John A. Swain, “Cybertaxation and the Commerce Clause: Entity Isolation or Affiliate Nexus?” Southern California Law Review, January 2002.) States like California confronting an entity-isolation strategy like Amazon’s should indeed pursue this approach, but it must be acknowledged that it is largely untested and that the few state courts that have considered it have split on its validity.
[32] See the source cited in note 30. See also: David Dekok, “Sales Tax or No Sales Tax: An Online Dilemma,” Harrisburg Patriot-News, May 26, 2008: “Patty Smith, a spokeswoman for Amazon.com, said the company legally avoids collecting sales tax in Pennsylvania because the distribution centers are owned by Amazon subsidiaries, not the parent company.”
[33] In May 2008, the Dallas Morning News began raising questions about how Amazon could have a warehouse in Texas and yet not charge sales tax in the state. (See: Maria Halkias, “Amazon.com May Owe Texas Millions in Uncollected Sales Taxes,” May 9, 2008.) Amazon replied that the warehouse was owned by a separate Amazon subsidiary, the state was well aware of Amazon’s presence, and the company was fully compliant with the state’s sales tax law. (Maria Halkias, “Amazon Says It Owes No Sales Tax to State,” May 9, 2008.) The company acknowledged later that summer that the structuring of the transactions as drop shipments involving its retailing arm and separately incorporated warehouses was the basis of its sales tax immunity: “We have an affiliate that operates our fulfillment center in Irving, Texas. . . . And it handles Amazon inventory that it sells and drop ships, and it also handles . . . Target inventory. . . . So they [the Texas fulfillment center] provide services to Amazon’s retail businesses, what I would refer to as a ‘drop shipper.’ . . .” Prem testimony at approximately 1:18.
Prem reiterated that Texas had completely signed off on the company’s position that despite the presence of the warehouse, it was not obligated to charge sales tax on any of its own retail sales into the state (Prem testimony at approximately 1:09). Nonetheless, in September 2010, Texas issued a $269 million tax bill to Amazon for uncollected sales taxes, penalties, and interest for the period from December 2005 to December 2009. Amazon indicated it would appeal that assessment. See: Eric Engleman, “Texas Slaps Amazon with $269M Bill for Uncollected Sales Taxes,” http://www.techflash.com/seattle/2010/10/texas-slaps-amazoncom-with-269m-bill.html?t=printable.
[34] Virginia has given an Internet retailer claiming to be engaged in a “drop shipment” from an affiliated in-state warehouse a formal acknowledgment that it is not required to charge sales tax in the state. (Rulings of the Tax Commissioner, Number 07-24, March 27, 2007; www.policylibrary.tax.virginia.gov/OTP/Policy.nsf.) On the other hand, New Jersey successfully challenged this kind of self-dealing “drop shipment” as an abusive transaction aimed solely at tax avoidance; the court held that the company was obligated to charge sales tax on drop shipments from the New Jersey warehouse owned by its subsidiary to New Jersey customers. (Drugstore.com v. New Jersey Division of Taxation, Tax Court of New Jersey, February 11, 2008.)
Amazon may have received advance rulings from states in which it has warehouses or other facilities (in addition to Virginia) that it is not obligated to collect sales taxes in those states. It also may have had that position upheld following an audit. Finally, it may have negotiated sales tax immunity with a state economic development department as a condition of agreeing to site the facility in the state.
[35] Prepared remarks of Paul Misener, hearing on “The Internet Sales Tax: Headaches Ahead for Small Business,” Subcommittee on Regulatory Reform and Oversight, House Committee on Small Business, February 8, 2006.
[36] Scott Morrison, “Amazon Fights Sales Tax Drive, Despite Modest Impact,” Wall Street Journal, June 25, 2009. Smith may have intended to say “simpler than” rather than “as simple as.”
[37] Amazon.com annual 10-K report to the Securities and Exchange Commission for 2008. Amazon does not separately report sales for the United States, Canada, and Mexico.
[38] See the testimony of Brian Bieron of eBay, Inc. at the same hearing at which Misener testified.
[39] See: Eric Parker, “U.S. Senators Introduce Sales Tax Streamlining Legislation,” State Tax Notes, December 22, 2005. Referring to one version of the legislation, which instead of a $5 million de minimis proposed that the Small Business Administration set the threshold, Neal Osten of the National Conference of State Legislatures stated: “You can’t expect an agency [the SBA] to do this in a reasonable time frame. It’s a poison pill. I think it’s really an effort to kill the bill. Amazon wanted a de minimis standard of $10,000, while eBay wanted it to be $21 million. There’s no real desire on their part [Amazon and eBay] to work this out.”
[40] Obviously with eBay in mind, Misener stated, “Amazon.com will offer sales tax collection services to our small business seller customers, and I am sure that our online competitors also can and will unless they can take advantage of some legal loophole.”