Texas Cracking Down on Amazon’s Sales Tax Policies

Kudos to sharp-eyed Seattle technology blogger Eric Engleman, who broke the news today that Texas issued a $269 million assessment against Amazon.com last month for failing to collect sales taxes on its sales in the state.  Engleman spotted the disclosure in the company’s third-quarter earnings report to the Securities and Exchange Commission, which was issued yesterday.

I wrote about Texas’ investigation of Amazon’s sales tax collection practices in a report last November.  The U.S. Supreme Court has held that catalog (and, by extension, Internet) sellers don’t have to charge sales taxes to customers located in states in which the seller doesn’t have a “physical presence” — such as a store.  Purchasers in such states are legally obligated to pay an equivalent “use tax” directly to their state, but very few do.

This exemption costs state and local governments billions of dollars annually that they badly need to fund everything from education to public safety.  It also kills local jobs by giving Internet and catalog merchants a 5 to 10 percent price advantage over Main street businesses.

All that is bad enough, but some companies — Amazon being the biggest example — have gone further.  Texas is one of at least a dozen states in which Amazon has a physical presence (in this case, a warehouse) but nonetheless doesn’t collect taxes.  Amazon has created separate “subsidiary” corporations to own those facilities and argues that since those subsidiaries aren’t the nominal seller of its merchandise, their presence in a state doesn’t obligate the company to charge sales taxes there.

(The Supreme Court decision that exempted companies like Amazon from collecting sales taxes didn’t clarify whether the “physical presence” requirement applies to the overall corporate group or to each corporation within the group.)

For more than two years, the Texas Comptroller has been investigating whether Amazon’s policy is consistent with the state’s sales tax law, and it has now evidently concluded that it isn’t.  Amazon’s quarterly report indicates that the $269 million assessment represents uncollected sales taxes for four years — from December 2005 to December 2009 — together with penalties and interest.  Amazon also said that it would “vigorously” defend itself against the assessment; a long court fight undoubtedly lies ahead.

This is just the latest in a series of state efforts to chip away at the problem of uncollected taxes on Internet and other “remote” sales.  New York and Colorado are pursuing different strategies.  With states and localities likely to face a severe financial squeeze for several more years, many more states will probably take similar steps to collect the sales taxes that are already due.