Susan Arledge: Collecting Sales Tax from Online Retailers

Susan Arledge

In February, the Texas comptroller demanded that pay $269 million in back sales taxes because an Amazon subsidiary operated a warehouse near Dallas. Amazon is appealing the order and playing hardball with the state of Texas, threatening to shut down its Irving distribution center and terminate 112 employees, attempting to get off the hook for collecting sales taxes from its Texas customers over the next 4.5 years. In return for the requested abatement, proposes to bring 5,000 jobs to the state, promising to spend $300 million to open more distribution centers in Texas.

In Texas, Internet retailers are required to collect sales tax only when they sell to customers living in a state where they have a physical presence, such as a store or office. That means under the current system, buyers save between 3 percent and 9 percent, but the state loses revenue. With sales tax revenue slumping, states are grasping for ways to collect those unpaid taxes.

Internet retailers cite a 1992 U.S. Supreme Court decision involving catalog sales, Quill Corp. v. North Dakota, which ruled that states could require only companies that had a physical presence within the state to act as tax collector. To get around the ruling, some states are expanding the definition of what it means to be ‘physically present.’ For example, an online retailer hiring a marketing firm or owning a subsidiary inside the state would qualify under definitions adopted in some states.

As a result, Amazon threatened to cut off marketing affiliates in Illinois and North Carolina. Last year, New York enacted a law that said Internet retailers’ practice of paying commissions to marketing agents based within the state constituted a presence, so Amazon has sued New York claiming the law there is unconstitutional. Earlier this month, Amazon severed ties with website affiliates in Connecticut after the governor signed into law a state tax on online purchases that is expected to raise $9.4 million.

South Carolina recently accepted a similar “offer” from Amazon. The deal will exempt Amazon from collecting state sales tax in South Carolina for five years. Amazon will, in turn, build a massive distribution center in Lexington County, creating 1,249 new full-time jobs and investing about $90 million in the state—but only after saying it would pull out of the state if the abatement was voted down.

Additionally, Amazon has indicated it could add three more facilities in South Carolina based on abating the online sales-tax collection exemption with the likelihood of creating more jobs beyond the 1,249 promised to Lexington County. The tax exemption for Amazon would be on top of a free site, property tax reductions on its equipment, state job tax credits, and repeal of Lexington County’s longtime restrictions on Sunday morning sales to facilitate the company’s round-the-clock operation. South Carolina business and political leaders are pushing the deal as a winner, because of the sizable payroll it would deliver to the state.

Susan Arledge is president of Arledge Partners Real Estate. Contact her at [email protected]