Over the next year and a half, the number of states where the world's largest Internet retailer is required to charge for sales tax will more than double to 13, up from five now.
For years, Amazon.com has avoided collecting sales tax from most of its U.S. customers. States that tried to force Amazon to play the role of tax collector faced lawsuits or threats by the company to close its local business operations.
But on Sunday, Amazon begins collecting sales tax in Texas, followed by Pennsylvania and California in September. Over the next year and a half, the number of states where the world’s largest Internet retailer is required to charge for sales tax will more than double to 13.
Since the recession, Seattle-based Amazon has come under attack from lawmakers in states looking to fill huge budget shortfalls. After initially fighting back, Amazon reversed course last summer in California and began to strike deals with states where it has, or soon will have, distribution centers. In most cases, Amazon’s promise to begin collecting sales tax carries a delay of months or even years.
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While critics long have argued that Amazon’s tax-free stance gives it a significant price advantage over traditional stores, not everyone is convinced the change will cause much, if any, slowdown to its business.
Some analysts say the move toward tax collection could work to Amazon’s advantage by enabling it to open more distribution centers throughout the U.S. That, in turn, could help Amazon lower its shipping costs and deliver products to customers more quickly.
In the past two years, Amazon has announced plans for first-ever distribution centers in California, New Jersey, South Carolina and Tennessee.
“Once they’re freed up to do business in more states, their ability to get you things cheaply and quickly will all get better,” said analyst Bryan Gildenberg, of Boston-based Kantar Retail. He went so far as to suggest that traditional retailers might even look back with nostalgia to the days of untaxed online sales.
“When they’re able to put distribution centers wherever … that has the potential to be a game changer,” he said.
Amazon, which declined to comment for this story, has sought to downplay investor concerns over its growing sales-tax obligations, noting it already collects tax in at least half of the places where it does business, including Europe.
Like other Internet retailers, Amazon has benefited from a 1992 Supreme Court decision that says websites do not have to charge sales tax in states where they lack a physical presence. Online shoppers are supposed to pay the tax when they file their annual state returns, but few do.
Last year, chains such as Walmart and Best Buy joined with smaller retailers throughout the U.S. to urge state lawmakers to compel Amazon to collect sales tax. They argue that by not charging the tax, Amazon enjoys a price advantage of up to 10 percent in some states.
Jason Brewer, a spokesman for the Retail Industry Leaders Association, a store trade group, cheered the looming tax deadlines in Texas, California and elsewhere. Since 2008, Amazon has charged sales tax in only five states: Kansas, Kentucky, New York, North Dakota and Washington.
“It’s a huge step forward in terms of leveling the playing field across the country,” Brewer said. “We’re getting to a point where, within 18 months, Amazon will be collecting in roughly half the country, in terms of population.”
What’s more, he said, the changeover in Texas sends a strong message to Congress that now is the time to pass federal legislation creating a standard sales tax across the U.S.
Among those calling for a federal solution is Amazon, which has argued that requiring it to navigate the varied rules and rates of more than 7,000 local tax jurisdictions would be unfair.
Amazon’s move toward sales-tax collection raises the likelihood that Congress will take action, said Michael Mazerov, senior fellow with the Center on Budget and Policy Priorities.
“When you have the largest Internet retailer collecting sales tax in a significant number of states — and now most of the largest states — that means millions of additional consumers get educated to the fact that taxes really are due on these purchases,” Mazerov said. “It makes the enactment of federal legislation both easier and more likely, politically.”
Even so, Amazon has shown little willingness to compromise in states where it has no current or planned physical presence.
And in Arizona, the company has contested a tax assessment of $53 million, what the state says it owes for nearly five years of uncollected taxes. Amazon has said its Arizona distribution centers do not constitute a physical presence because they’re owned by a subsidiary.
“I don’t expect the company to just roll over and start collecting sales tax everywhere,” Mazerov said.
In September 2010, Texas hit Amazon with a $269 million bill for uncollected sales taxes over a four-year period. Amazon responded by closing a distribution center near Dallas last year, but it struck a deal with the state comptroller to begin collecting sales taxes from Texas customers on July 1.
To resolve the dispute, Amazon also said it made an “immaterial payment” on the assessment and promised to create 2,500 new jobs and invest $200 million in the state. Some critics cried foul, saying the Texas Constitution forbids the state from forgiving tax debts.
“It’s just ridiculous. If we’re going to do this, we can’t just do it for big companies,” said Buck Wood, a Texas tax attorney and former deputy comptroller. “This is headed to the courthouse.”
Unlikely to suffer
Since 2008, when Amazon began charging for tax in New York, its North American sales have more than doubled, topping $26.7 billion last year. (The company does not provide a state-by-state breakout of its sales.)
That just goes to show that Amazon is unlikely to suffer amid new tax obligations, said Kantar Retail’s Gildenberg.
Amazon built its large customer base by becoming known for low prices, but it also offers vast selection and fast, reliable delivery, he said.
He also suggested that customers who leave Amazon over the sales-tax issue are no big loss.
“All retailers have shoppers who are acutely price sensitive. They call them cherry pickers and try to get rid of them,” he said. “The shoppers most responsive to the changes in sales tax are probably among Amazon’s least profitable shoppers anyway.”
Amy Martinez: 206-464-2923 or firstname.lastname@example.org