Texas Tax Man May Cometh for Amazon

The state of Texas may be the latest to take a bite out of Amazon’s bottom line by assessing sales taxes on past purchases by state residents.

Texas tax officials are reviewing the taxable status of Amazon purchases after an inquiry from the Dallas Morning News, which asked why the e-tailer appeared not to be collecting sales taxes from Lone Star State buyers.

A landmark 1992 Supreme Court ruling gave states the ability to collect sales taxes from out-of-state retailers only in cases where the merchants have a physical presence within the state’s borders.

An In-State Operation

The newspaper asked the state’s comptroller why taxes weren’t being collected in the state, it reported. The office told the paper that tax collection officials were not aware that an in-state operation existed.

On its Web site, Amazon lists Dallas as one of its 15 fulfillment centers nationwide, and its careers page lists several jobs in the Dallas metro area. Amazon opened the Texas facility in 2006, the paper said, noting that the e-tailer may owe the state millions in yet-uncollected taxes.

“We’ve been operating in Texas since 2000 and, as part of that operation, we have been and continue to interact with state and local tax officials at all levels,” Amazon spokesperson Craig Berman told the E-Commerce Times. “We believe we are in compliance with all Texas laws governing sales tax collection.”

The office of Texas Comptroller Susan Combs did not return calls seeking comment.

Millions at Stake

The Texas situation arose just days after it became widely known that Amazon recently sued the state of New York for its Internet sales tax collection activity.

In that suit, Amazon claimed that New York’s Internet Sales Tax Collection law violates the tenets of that same 1992 ruling by the Supreme Court by taxing Amazon purchases because some of the e-tailer affiliates have brick-and-mortar presences in New York State.

The stakes could be high for Amazon and Texas alike. The state’s comptroller estimated late last year as part of a study of the issue that US$541 million in potential sales tax collections were lost during 2006 because sales were made online.

While it’s unclear how much of that Amazon accounts for, the state says it has the power to levy penalties and interest on any unpaid taxes.

A larger worry from the e-commerce and Internet industries has been the potentially chilling effect on the sectors’ growth if taxes were suddenly levied more frequently. Customers have come to expect many online purchases to be tax-free, but may not necessarily change their habits if that weren’t true, said JupiterResearch analyst Ed Kountz, who cited a recent consumer survey that found that a fourth of all online buyers were spurred on by the tax-free status of their Web buys.

“The other motivations to shop online don’t go away if taxes come into the picture,” he told the E-Commerce Times. “There’s still plenty of motivation to avoid spending time in traffic [and] money on gas, and for the simple convenience of shopping online.”

Help From Above?

Over the years, Congress has repeatedly flirted with the idea of settling the Internet sales tax question once and for all, either with a permanent moratorium on them or by creating a uniform standard that would apply in all states and to all buyers.

The 1992 ruling that has been the guiding force in the sales tax debate dealt with a state seeking taxes from a mail-order catalog company — office supply retailer Quill and North Dakota were the parties — and not e-commerce at all.

Still, it’s unlikely Congress would take revenue away from states they are now collecting under existing tax laws, with some kind of compromise measure needed that would keep states whole and also give online retailers — and their investors — some confidence about what the future holds.

“It becomes a lot harder for Amazon to adjust to what’s coming when different states are doing different things,” Forrester Research analyst Carrie Johnson told the E-Commerce Times. New York’s taxation for affiliates, for instance, poses the risk of others following suit, which is one of the reasons Amazon moved in the courts as rapidly as it did.

Much has changed since 1992, meanwhile, with even smaller retailers now able to afford technology that can quickly differentiate tax-exempt buyers based on their ZIP codes and with the industry having reached a certain level of maturity. “The argument that taxes will stifle growth is complicated now because so much of online commerce stems from multichannel retailing,” Johnson noted.

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