States are continuing to look for ways to increase revenues without adding new taxes, or increasing rates. As a result, they are continuing to pursue online retailers. The first half of 2012 saw a significant shift in Amazon.com’s strategy of resisting these demands for state tax collection as the online giant began reaching agreements with several states, suggesting a change in both the states’ efforts to collect tax from online retailers and Amazon’s efforts to expand its business.
Internet Sales Tax
Amazon already collects and remits sales tax to six states (Kansas, Kentucky, New York, North Dakota, Texas and Washington). The following states have recently made agreements with Amazon to begin collecting sales tax over the coming years:
- September 2012 – California and Pennsylvania
- 2013 – New Jersey and Virginia
- 2014 – Indiana, Nevada, and Tennessee
- 2016 – South Carolina
Other states, where agreements have not been reached, continue to look at options:
- Colorado also attempted to collect sales tax from the online retailer, but a federal judge ruled a state law requiring out of state venders to report and collect sales tax on remote purchases was unconstitutional
- An effort by Arizona to enact new legislation to collect and remit sales tax on internet purchases failed in the Arizoina State Senate earlier this year. However, Arizona tax officials moved forward issuing a $53 million assessment against Amazon for unpaid sales tax from 2006 through 2010. The assessment is currently in the process of being resolved
To reach agreement with some of the states listed above, Amazon is agreeing to remit and collect sales tax in exchange for various economic incentives:
- Texas – The state dropped an effort to collect $269 million in back sales tax in return for Amazon agreeing to collect and remit sales tax starting July 1 and investing $200 million in the state creating 2,500 new jobs
- California – In exchange for pledging to build $500 million in new facilities and hiring 7,000 workers, Amazon will become eligible for enterprise zone hiring credits of up to $37,000 over five years for each qualified worker it hires. Amazon could also be eligible for sales tax revenue sharing with local governments and an exemption from sales tax on qualified equipment purchases
- New Jersey – Amazon agreed to begin collecting sales tax on New Jersey customers’ online purchases beginning July 1, 2013, in exchange for economic development incentives from the state for construction of two fulfillment distribution centers. The distribution centers are expected to result in a $130 million capital investment creating 1,500 new jobs in the state
- Indiana – The Indiana Economic Development Corporation is providing Amazon up to $2 million in tax credits and training grants, in exchange for Amazon agreeing to collect sales tax starting January 1, 2014, and investing $150 million in the state creating an estimated 1,000 jobs
- Tennessee – Under Tennessee law, a company that invests at least $350 million and creates a minimum of 3,500 jobs in the state by January 1, 2014, will be exempt from collecting sales tax until that date. Amazon is projected to meet this requirement.
While Amazon is working on a state by state basis to address the collection and remittance of sales tax, Congress is simultaneously addressing the issue. There are various bills being considered in the House of Representatives and the Senate. Most have exemptions for sellers with less than $500,000 in annual sales designed to shield smaller, online retailers from being subject to collect and remit sales tax in various states.
Critics of the bills say they punish businesses in states with no sales tax by imposing an unfair burden of sales tax collection and remittance.
Proponents argue that the bills protect states’ rights, address the states’ fiscal needs, and level the playing field for all sellers. They also argue the $500,000 exemption threshold would apply to 99% of online sellers and would prevent applying an unjust burden on smaller retailers and believe that many online retailers are currently exercising a business model that encourages tax avoidance by consumers.
It should be noted that while the Senate bill is close to obtaining the 60 votes necessary to pass, the House bill is not expected to move quickly, and the current administration has not taken a position on this issue.
It should also be noted that while sales taxes are required to be paid by the consumer regardless of whether they are collected by the retailer, it is impractical for the states to force collections from the customer; therefore online retailers collection and remittance of sales tax to the states will generate additional revenue, and as mentioned above, this is particularly important in these times of states having tight budgets.