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States stand up to Amazon

By Kay Bell ·
Thursday, May 5, 2011
Posted: 1 pm ET

Cash-hungry states are beginning to stand up to Inc., the online bookseller-turned-general-merchandiser, when it comes to taxes. And things are starting to get nasty.

At issue is whether Amazon and other online retailers are legally required to collect sales taxes on purchases made in various states. The general rule, thanks to a 1992 Supreme Court decision, is that Internet sellers don't have to collect state sales taxes unless the business had an actual physical presence, known as nexus, in the state in which the buyer lives.

But what exactly constitutes nexus? In today's ever-increasing virtual world, a definition clarification might take another ruling from the nine justices.

Meanwhile, states are making their own rules.

New York took the lead, arguing that websites (and blogs) operated by their residents and which run ads that produce income for the website owner and/or blogger, means the remote sellers have a presence, that is, a nexus, in the Empire State. Therefore, Amazon must collect and remit to New York sales tax.

Other states soon followed this tax route.

Here in my home state of Texas, the state House overwhelmingly approved a bill that would change the definition of what it means to have a physical presence in Texas. Essentially, Internet companies would be required to collect sales taxes if they pay marketers in the Lone Star State to advertise for them.

And still other states are taking tougher stances on actual Amazon physical presences. They are forgoing potential future tax revenue and jobs because they say they can't afford to provide tax breaks now.

That's the case in South Carolina. The Palmetto State's former governor Mark Sanford agreed to support a tax break for Amazon as way to entice the company to build a distribution center in the state.

But Sanford's gone and the current South Carolina General Assembly said thanks, but no thanks to Amazon. You can still build here, lawmakers told the Internet giant, but you'll get no special tax treatment to do so.

Amazon promptly halted work on its distribution center in Lexington County. That means the loss of a reported $10 million investment and an estimated 1,200-plus jobs.

Some South Carolinians are worried that the no-tax-break vote will make the state look unfriendly to business. Supporters of the lawmakers' move, however, say it's simply a matter of tax fairness.

The South Carolina move was a tough call, especially in these economic times. State residents who were hoping to get a job at the Amazon facility might not look too kindly on lawmakers who cast the anti-Amazon vote when the next election rolls around.

But I think they did the right thing. State perks, from corporate income tax credits to property tax abatements to upfront cash grants, aren't necessarily the best way to attract the best businesses.

States are pitted against each other in bidding wars, and the one that gives up the most wins the business relocation battle, but loses the overall tax collection war. It's highly unlikely the state will ever be able to fully recoup the tax revenue surrendered just to get a company within their borders.

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May 09, 2011 at 3:12 pm

The first penny of tax a state collects after luring a company is more than would be collected if the company sets up shop elsewhere. Not to mention the income tax collected from the employees, or the sales and property taxes on the money thereafter.

I don't understand how you can consider 'tax revenue surrendered' some type of loss, when without tax breaks in this particular case, you'd have nothing.

May 05, 2011 at 1:50 pm

This debate kind of begs the question about where the money would be best put to use. If the States don't collect state sales tax on Amazon and Amazon therefore contributes to the job market in a given state the jobs created by Amazon will contribute to the economy of the State on the private sector side but also on the tax side as those employees will pay taxes to the state.