Texas blinked – Amazon won’t be collecting sales tax after all

Texas Gov. Rick Perry told The Washington Examiner on Friday that Amazon won't have to collect sales tax for the state of Texas; he will ask the state legislature to clarify the legal issue.This is only the latest part of  an ongoing saga. Various states have been trying to get Amazon to collect sales tax for years now; I don't think any have succeeded. But first, a little background. A retail store has to collect sales tax because they operate in a specific state. But an online operation only has collect sales tax for the state or states it has a presence in (with a coupe exceptions).

You might recall that back in 2008, New York tried to get Amazon to pay the sales tax based on the fact Amazon had affiliates in NY (technically that qualifies as a presence in the state). Amazon responded by canceling all the NY affiliates. Colorado tried much the same trick last year, and Amazon dropped those affiliates, too.

The tussle in Texas was slightly different. Amazon has a distribution center in Texas, so the state comptroller's office concluded that since Amazon operated in Texas, Amazon should collect Texas sales tax. The comptroller's office sent Amazon a bill for $269 million in unpaid taxes (and penalties).

Amazon responded with the claim that the distribution center was not part of Amazon; it was owned and run by a subsidiary. They also disputed the tax bill with the appropriate state office, which is not unreasonable (from their viewpoint, at least). And they responded with a threat. If  Texas didn't back down, Amazon would close the distribution center and move it elsewhere.

And the G0vernor blinked.

On the one hand, Amazon really should have been collecting taxes. The obvious interpretation of the tax laws showed that Amazon did indeed operate in Texas. On the other hand, how long did the state let Amazon operate without trying to enforce the tax laws?

P.S. Do you want to know one of the other curious aspects of our tax laws? Amazon decided that Agency priced ebooks were subject to state sales tax (because Amazon was just an agent for the publishers). This let Amazon raise the effective prices slightly on Agency Ebooks, and thus discourage customers from buying them. This was a subtle way to hit back at the publishers. Clever, that.

image By Calsidyrose

About Nate Hoffelder (11579 Articles)
Nate Hoffelder is the founder and editor of The Digital Reader:"I've been into reading ebooks since forever, but I only got my first ereader in July 2007. Everything quickly spiraled out of control from there. Before I started this blog in January 2010 I covered ebooks, ebook readers, and digital publishing for about 2 years as a part of MobileRead Forums. It's a great community, and being a member is a joy. But I thought I could make something out of how I covered the news for MobileRead, so I started this blog."

14 Comments on Texas blinked – Amazon won’t be collecting sales tax after all

  1. Interesting to see that Texas preferred the Income Tax that they collected from the employees to the sales tax.

    I’m not sure I understand why the agency model would be affected by taxes, but if the price was raised over the amount the publisher set, then it’s not agency pricing.

    It will be interesting to watch this tax issue as it gets resolved. It’s not good fiscal policy to let so much tax revenue sit on the table.

    I think the eventual outcome will be that online retailers will be required to start collecting and remitting tax based on the location of the sale.

  2. Texas does not have a state income tax. We have sales taxes, property taxes, fees and tolls out the wazoo, but no income tax.

  3. Classical example of rent seeking really. The story has yet to be told of how avoiding tax has aided Amazon’s rise against all other bricks and mortar retailers. American free enterprise at its finest!

  4. taxpayer3498576092 // 14 February, 2011 at 4:31 pm // Reply

    There are evidently many obvious interpretations of the law. Does a Seattle based corporation operate in Texas when they drive through Texas on the way to deliver in Florida? Does Amazon have a physical presence in Texas when the truck driver stops for the weekend? Does the truck driver purchase the package from Amazon to sell to the puchaser upon delivery? Is there any business transaction at all in Texas besides salary for the warehousers and drivers? The answer seems very obvious that Amazon does not do business in Texas even when an on-line buyer lives in Texas. Amazon does not have a physical presence in Texas because that depends on the conduct of intra-state commerce and business in Texas where Texas Law applies. On the other hand, maybe the Fulfillment Center purchases from Amazon and resells to the Texas residents if they so obviously should have been collecting sales tax. I am obviously doubtful.

  5. I’m a sales and use tax expert with over 25 years of experience. You are incorrect when you say Amazon had a presence if the distribution center was not owned by them. Nexus applies only to operations under the same FEIN. That’s been true in sales tax since long before the Internet or Amazon existed. The part about the Amazon fight that is so amazing to me is that consumers cheer them on; not realizing that just because Amazon is not legally obligated to collect and remit the sales tax, does not mean the sale is exempt. Those sales are all still subject to tax; it’s called a use tax. If Texas wants to end this fight quickly, it should just start sending bills to all Amazon customers for everything they’ve purchased. Once Amazon customer start complaining because they had to pay the tax, the interest and the penalty, Amazon will register or lose business.

    • Interesting. I didn’t know that. Thanks!

      • Twenty-two states have the use tax on its books but the reality is that hardly anybody ever pays it. The use tax is usually included on a state income tax form.

        Because so many of these states know hardly anybody’s paying the use tax some have tried to make the use tax based on an individual’s income. For example, in Michigan an individual with an income of $45,000 would pay $23 in Use Tax on their return. The tax tables usually calculate only purchases up to $1,000. After that, the resident is supposed to calculate what they owe on their own solely on the honor system.

        What LL says Texas should do seems as if it would require an agreement between the state of Washington and the state of Texas. Apparently, New York and Connecticut have such an agreement but I don’t know if any other states have such agreements. The two states exchange tax audit data from businesses based in each state and send a bill for the use tax to the buyer.

        Frankly, I don’t think Washington would have any interest in an agreement like that at all. If the state did that I think Amazon would simply pick up and move to a more business friendly state. Even if that would result in a relatively small number of lost jobs, it’s still lost jobs. That’s not something any state government wants to see happen in today’s economy and no politician is going to want to campaign on supporting a bill that resulted in a major corporation leaving the state. Plus, it would cost customers extra money. Politically, I think it’s a non-starter for Washington; they’ve already lost money because Boeing decided that rather than buckle under the state’s tax laws they’d just build the 787 in South Carolina instead of Washington.

        There’s more recent examples of Amazon killing the affiliate program in states that assert sales tax liability than those you list. In January 2011, Illinois passed a law exactly like New York and Colorado’s so Amazon sent letters to affiliates in the state saying they would have “no choice” but to cut them off if Governor Pat Quinn signed the bill in to law. According to the same article, Amazon’s cut ties with affiliates in Rhode Island and North Carolina recently too.

        http://www.maximumpc.com/article/home/amazon_threatens_kill_affiliate_program_illinois_response_proposed_tax_bill
        Those states have done nothing more than hurt small businesses that use Amazon to sell their goods.

        • Right. Texas does have a use tax law on the books, but they don’t go after people for non-payment. Our Comptroller believes since the distribution center works on behalf of Amazon, that sales tax should be charged. I’m not an expert, but I have read the law (I have a certificate and want to follow the law when it comes to charging tax) and distribution centers are specifically mentioned.

          I’m no lawyer, but it seems at this point that the thing for the Comptroller for Governor to do is go to the Attorney General’s office for an opinion on the law as it is written. The next step would be to ask the Legislature to change the law, if necessary. (I’ll refrain from making snarky comments about how Texas politics work.)

  6. Howdy~

    I stumbled across the image of the turquoise-stone Texas-shaped pendant and realized that it came from my Flickr photostream. Please add this link back to my photo to the image: http://www.flickr.com/photos/calsidyrose/3965152645/

    Thanks, Calsidyrose (C. Bruhn)

  7. Thank God Texas blinked. If it weren’t for the ability for people to move out of the jurisdiction of a given government there would be no way to escape this kind of extortion and bullying. It’s beyond unethical and insane that politicians feel entitled to any money being made, just because they have the power to obtain it. How have we let this become so commonplace? Why do people not see how unethical it is to take things by force and without consent of the people from whom you take it?

  8. Oh, and before anyone replies with the “corporations are evil so we need to use force to redistribute that wealth” argument, let me preemptively reply. Yes, wealth distribution is clearly unfair right now. No, that does not make it ethical to use force. We absolutely can solve wealth distribution without resorting to extortion, bullying, and threat of violence. Government insiders promote the idea that you need them for wealth redistribution because they profit from the money flowing through them. The government is the least efficient organization and the least efficient use of funds and resource allocation because of corruption. The government loses track of more money every year than ANY company in the world makes in profit. We must fix this from both sides – through responsible markets and through reduced governments.

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