Amazon’s Exit Spurs Tax Fight in Texas

Daily News Article — Posted on February 18, 2011

(by Ana Campoy, The Wall Street Journal, WSJ.com) DALLAS – The planned closure of an Amazon.com Inc. distribution center in a suburb here has opened a debate about whether taxes or jobs is the better answer for Texas’ tattered budget.

The online retailing giant said last week that it would close its center in Irving [Texas] due to a dispute with the state comptroller, who is demanding that Amazon pay $269 million in sales taxes it should have collected on goods sold to Texas residents.

Comptroller Susan Combs, a Republican, said she was disappointed to see the facility’s 119 jobs go, but her duty was to collect.

That position had caused discomfort for Gov. Rick Perry, who promotes his policies as job-creating. In a rare public disagreement with a fellow Republican, he said Ms. Combs made the wrong call.

“The governor was not happy with the outcome,” of the tax fight, said Katherine Cesinger, a spokeswoman for Mr. Perry.

The disagreement comes as state legislators try to tame Texas’ budget deficit, estimated at $15 billion to $27 billion.

As other states grapple with their own shortfalls, the pressure is rising to generate tax revenue from online purchases.

The Supreme Court ruled in 1992 that businesses without a physical presence in a state are not obliged to collect taxes on the goods they sell there.

Since then, states have been trying to get Congress to change the law or have been seeking a way around it. A coalition of states has lobbied Congress to force online retailers to collect some taxes-so far without success. Some states, including Illinois and New York, broadened the definition of “physical presence” to include online retailers who pay commissions for referrals by local partners. Illinois lawmakers recently passed a similar bill, which awaits the governor’s signature. Amazon has responded to the various laws with lawsuits or by cutting ties to the local businesses.

The uncollected taxes of goods sold online and through catalogs amounted to $8.6 billion in 2010, according to the National Conference of State Legislatures.

With its Irving warehouse, Amazon is considered to be doing business in Texas and is required to send in sales taxes for items it sells to state residents, Ms. Combs has argued. Last September, she sent Amazon a bill for taxes she said the company failed to collect from 2005 to 2009.

Amazon declined to comment, but in filings with the Securities and Exchange Commission, it has described the comptroller’s argument as without merit. In January, the company sued Texas, demanding documents related to the comptroller’s calculations, but the comptroller said those documents are not public.

But Mr. Perry seemed to side with Amazon when he told the Washington Examiner in an interview that having a store front historically had determined whether a company had to collect taxes. “This obviously didn’t have a store front,” he told the newspaper of the Amazon center on Friday.

More recently, he called for the clarification of the state’s tax laws “to further strengthen the reliability of our tax system and to protect Texas jobs,” according to Ms. Cesinger, the spokeswoman.

One state legislator sought to settle the matter. Rep. Elliott Naishtat, a Democrat from Austin, introduced a bill this week that would require online retailers that sell more than $10,000 in Texas through referrals by local partners to collect taxes for the state.

Mr. Naishtat said in an interview the bill is “a possibility of generating hundreds of millions of dollars in a time of critical need.” Mr. Perry hasn’t publicly indicated a position on Mr. Naishtat’s proposal.

In the meantime, Ms. Combs is not backing off her fight with Amazon, which is pending in the State Office of Administrative Hearings. She said the state loses $600 million a year in uncollected tax revenue from online sales. She has said she has demanded back sales taxes from some other online outfits, but declined to identity them.

“To make an exception in this case would create an unfair advantage for Amazon,” said Allen Spelce, spokesman for the comptroller’s office.

Write to Ana Campoy at ana.campoy@dowjones.com.

Background

The Supreme Court ruled in 1992 that businesses without a physical presence* in a state are not obliged to collect taxes on the goods they sell there.
*A physical presence is an actual building or office, as opposed to just a website that people visit.

Some states, including Illinois and New York, broadened the definition of "physical presence" to include online retailers* who pay commissions for referrals by local partners.

*Online retailers [Amazon.com] who pay commissions for referrals by local partners - it works like this: a local partner recommends a particular product: a book, electronic gadget, ect., and provides a link to Amazon.com on their own website. If the user of the local partner clicks on the link to Amazon and buys the product, Amazon gives the local partner a small commission on each item it was able to get its visitor to purchase.