Amazon's Tax-Free Ride May Be Ending
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By Jim Brunner
When word emerged that Amazon.com was hunting for new warehouse sites in Columbia, S.C., leaders in that business-friendly Southern state rolled out a welcome mat of tax breaks to lure the Internet retailer.
Code-naming their effort "Project ASAP," South Carolina officials offered up more than $33 million in incentives, including free land, a property-tax cut and payroll-tax credits. They even agreed to loosen the area's Bible Belt moral code, repealing a decades-old Lexington County "blue law" so Amazon's warehouse could stay open Sunday mornings.
As they discovered, that wasn't enough.
Amazon also insisted on an exemption from collecting the state's 6 percent sales tax on purchases by South Carolinians. When the state legislature balked, voting down the sales-tax break last spring, Amazon stopped construction on its million-square-foot warehouse and prepared to leave, throwing thousands of jobs into jeopardy.
The threat worked. After an intense fight that pitted Amazon and local economic development boosters against small businesses and big retailers like Walmart, lawmakers reversed themselves and handed Amazon a five-year sales-tax reprieve.
The South Carolina episode is one of many confrontations Amazon has faced in its national fight to hang on, for as long as possible, to one of its major advantages over brick-and-mortar retailers.
The world's largest Internet retailer currently collects sales taxes from customers in just five states, giving it a price advantage of up to 10 percent in most of the country.
But the days of tax-free Internet shopping appear to be coming to an end, something that Amazon itself has conceded in recent months.
States have lost more than $52 billion during the past six years due to untaxed Internet purchases, according to a University of Tennessee study. Facing massive budget deficits that threaten further cuts to schools and social services, an ever-growing chorus of lawmakers has called for an end to the sales-tax edge long enjoyed by Internet retailers.
The backlash against the tax break - and Amazon's political tactics - has cut across party lines in many states, uniting tea party Republicans and liberal Democrats alike.
"The perception of the company has changed 180 degrees. It is viewed as the bully in these situations," said Michael Mazerov, senior fellow with the Center on Budget and Policy Priorities, a critic of Amazon's sales-tax stance.
In Congress, bipartisan legislation to fix the online tax loophole is gaining momentum - and Amazon itself has strongly endorsed the proposals, so long as they also apply to its competitors.
"We have always supported a federal solution," said Paul Misener, Amazon's vice president for global public policy.
Not content to wait, at least 23 states already have enacted or proposed legislation to force Internet sales-tax collections.
For years, Amazon has responded to those state moves with bluster, lawsuits, threats to close warehouses and abrupt cuts of ties to thousands of websites in states that forced the tax issue.
"We have vehemently opposed the unconstitutional solutions that the states have taken," said Misener.
But recently, Amazon has backed down in the face of resolute governors and state legislatures, agreeing to collect sales taxes in several states despite its longstanding protestations that states had no legal right to force the issue.
Mapping Out Taxes
Taxes were on Jeff Bezos' mind right from the beginning of Amazon.
He once told an interviewer he'd thought about founding his Internet bookseller startup on a California Indian reservation to escape taxes. When that proved impractical, Bezos settled on Seattle, in part because Washington's relatively small population effectively would leave more Amazon sales untaxed.
For more than a decade, Amazon has aggressively resisted individual state efforts to require sales-tax collections, citing a 1992 Supreme Court ruling that said businesses with no physical presence, or "nexus," such as a retail store, in a state cannot be required to collect sales tax.
That ruling, in Quill Corp v. North Dakota, came in the case of a mail-order catalog. But it has been applied to online retailers, creating an ever-expanding loophole in sales-tax collections as more purchases are made over the Internet.
Technically, customers who buy goods online are required to pay their state's sales tax, but it almost always goes unpaid if Amazon or other online retailers do not add it to their bills. In Washington state, where Amazon does collect sales tax, the state estimates it will lose $446 million next year from untaxed sales through other out-of-state Internet retailers.
In a May interview with Consumer Reports, Bezos said Amazon plays by the same rules as other companies, and it is up to Congress to fix the problem. "I don't think our customers would say, 'Why don't you guys just optionally collect the tax? I know you aren't required to do it, but aah, go ahead!'" he said.
Even as it has expanded nationally, the company has operated its warehouses and Kindle research lab in legal subsidiaries - arguing those facilities do not count for sales-tax purposes.
"They are corporately separate and [Amazon's] retail business is not the parent," Misener said.
According to confidential internal documents, Amazon also has tightly restricted employee travel to avoid taxes, instructing workers to beware of working in states where their presence might trigger tax liability.
The company has handed out a color-coded U.S. map to employees, ranking states from "green" for the safest destinations, to "red" for those that pose a "significant risk" requiring special approval to visit.
The company's map and travel policy were first disclosed by The Wall Street Journal in August. The Seattle Times obtained copies of the maps and related documents from court filings in a lawsuit brought against the company by a former Amazon software engineer.
In one internal memo, Amazon talked up the need for vigilance, noting the economic downturn has caused states "to become more aggressive and more focused" on Amazon's tax treatment, a trend "which could expose our business to significant tax costs."
Amazon's efforts to avoid collecting sales taxes are defensible in states where it truly has no physical presence, said David Brunori, professor of public policy at Georgetown University and contributing editor to State Tax Notes magazine. "There is nothing irrational or evil about that," he said.
But Amazon crosses the line by demanding such exemptions even where it has opened warehouses or other facilities, Brunori said, criticizing states that have cut deals allowing the company to avoid or delay sales-tax collections.
"You let them off the hook for what you make every brick-and-mortar retailer in the state collect? That runs counter to every notion of good tax policy," he said.
In South Carolina, leaders who gave Amazon the sales-tax break say they have no regrets. After all, if they'd said no, the company would have moved its warehouse to a nearby state.
"It's easy to be against something if you have a job," said House Majority Leader Kenny Bingham, R-Cayce, who represents the area near the Amazon warehouse. "We're going to get 2,000 jobs and $125 million in investment we wouldn't get otherwise."
Going all out to land a new Amazon distribution center was a "no-brainer," said Randy Halfacre, mayor of the town of Lexington and president of the local chamber of commerce. "It's not a sweetheart deal - we need these jobs."
With the nation's fourth highest unemployment rate last year - and Walmart as its largest private employer - South Carolina has worked hard to recruit new companies.
The state boasts of its low unionization rates and regularly offers substantial tax breaks to corporations that relocate or open new factories here.
Amazon wasn't the first Seattle-connected company to take up South Carolina on those offers.
In 2009, Boeing announced it would build its new 787 production line in North Charleston, attracted by the nonunion work force and an incentive package worth $353 million over 15 years. And Starbucks built a coffee-roasting plant in Calhoun County, which got a $2.25 million state grant to help make way for the facility.
The Amazon warehouse proved far more controversial. It wasn't the $5 million in free land or the property- or corporate income-tax breaks - all viewed as the usual economic development enticements.
What angered opponents was the initially unpublicized pledge to Amazon by outgoing Gov. Mark Sanford's administration that the company would remain exempt from collecting South Carolina's sales tax.
That provoked a backlash from local retailers who said that amounted to favoring a giant out-of-state corporation over mom-and-pop stores.
"It creates an unlevel playing field for small businesses here in South Carolina that have paid taxes forever," said Buddy Delaney, who owns Best Mattress, a West Columbia store that's been in his family since 1928.
Even some local tea party groups, despite their general anti-tax sentiment, opposed the deal as an insult to local businesses. "We just felt like it was really a matter of ... South Carolina's dignity," said Don Weaver, president of the South Carolina Association of Taxpayers.
Other states have grown reluctant to give in to Amazon, pursuing new legal arguments to redefine what it means for a business to have a physical presence in a state.
In 2008, New York passed a law saying Amazon had to collect sales taxes there because of relationships with thousands of local "affiliate" websites. Those sites are typically run by small businesses, blogs or nonprofits, which earn commissions by linking to products sold on Amazon.com.
But increasingly, Amazon has been conceding its days as a tax-free haven are numbered.
The most telling shift came in California, after the state legislature approved several measures requiring Internet sales-tax collections by Amazon and similar Internet retailers. Those laws targeted Amazon's Web affiliates in the state, but also said the company's Kindle development facility in Cupertino was enough to establish tax liability.
Since then, similar deals have been reached in other states where Amazon has warehouses. Amazon will be required to collect Pennsylvania's sales tax starting in September, under an administrative ruling. Indiana and Tennessee will follow in 2014. Internet sales-tax legislation has passed in Virginia and is actively being debated in several other states, including New Jersey, Georgia, Michigan and Florida.
Will Congress Act?
In recent months, Amazon has been vocal in its support of bills before Congress that would end the online sales-tax loophole on a national level.
Amazon's pivot has been met with skepticism by some of its Internet rivals. Some experts view Amazon's support for federal legislation as convenient, given a hyperpartisan atmosphere in Congress that may prevent any agreement on taxing Internet sales.
Even if Congress does act, some business analysts say no one should expect Amazon's retail growth to be derailed.
A report by William Blair & Co. found Amazon's prices would remain competitive even when sales taxes are added. After examining 2,400 products, the analysis found Amazon would still beat competitors' prices on identical items 46 percent of the time, even with sales tax.
Customers are drawn to Amazon's convenience, customer reviews and easy product comparisons - not just the sales-tax advantage, said Mark Miller, the analyst who wrote the report.
"For those who hold out hope that Amazon's momentum will be derailed by collection of sales taxes on a national basis - they might be sorely mistaken," Miller said.
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