I was recently reading an article in Fortune Magazine highlighting the long battle Amazon has waged with tax collectors. I knew that Amazon has been lobbying in favor of the burdensome Marketplace Fairness Act, but I was prompted to do some additional research on the flip-flopping Amazon has done on the issue.
Ever since Amazon.com was first founded by Jeff Bezos in 1994, the company has been an adamant adversary to Internet sales tax. Fueled by the growth of the online marketplace as well as about a 10% price advantage due to tax avoidance, Amazon grew very quickly selling to all 50 states within its first two months (Wiki). However, after two long decades of fighting tooth and nail against the collection of sales tax from online retailers, why has Amazon suddenly flip-flopped and joined the other side of the argument? To answer this question we first have to establish the long history of Amazon firmly opposing online sales tax.
The fight between states and retailers on collection of online sales has been contentious since 1988, when tax men in North Dakota went after the Illinois based Quill Corp., a major purveyor of office equipment. Quill Corp. fought against collecting the 5% sales tax from customers in North Dakota, and prevailed in the 1992 U.S. Supreme Court decision. The Supreme Court ruled that forcing distant sellers to collect sales tax for thousands of local jurisdictions violates the U.S. Constitution’s commerce clause (Tax Foundation).
In the early years, when it was convenient for Amazon, they constantly were using anti-Internet sales tax and limited government rhetoric, piggy backing off of the Quill v. North Dakota decision to avoid collecting sales tax even as they expanded physical locations into almost every state in the country and became larger and larger every day. In 1998, Jeff Bezos openly admits to Fast Company that the founding of Amazon in Seattle was based on the principle of settling in a small tax-friendly state. He even investigated the possibility of buying land on an Indian Reservation near San Francisco to avoid tax law all together, but admitted it was illegal (Fast Company).
One of the earliest battles came when Barnes & Noble sued Amazon in 1997 for false advertising, after claiming to be “Earth’s biggest bookstore.” The case was dropped only after Amazon countersued Barnes & Noble. At that time, when Amazon was still small, Barnes & Noble had physical locations all over the country and Amazon said that Barnes & Noble not collecting sales tax for online sales was exploiting an “unfair method of competition.” Barnes & Noble avoided the accusations from Amazon by claiming entity isolation (or independent locations) (NY Times). However, as Amazon grew, they too began taking advantage of this loophole in tax collection as well.
Amazon’s Vice President for Global Public Policy, Paul Misener, at the time argued, “Far from an e-commerce loophole, the constitutional limitation on states’ authority to collect sales tax is at the core of our nation’s founding principles,” (Fortune).
The key to Amazon’s successful avoidance of sales tax, is setting up locations that do not fall under the “nexus” of the parent company and therefore to not qualify as physical locations within a state. Amazon has placed fulfillment in separate legal subsidiaries. By doing this, Amazon claims the locations don’t represent a “physical presence.” However, they currently have 80 of these enormous fulfillment centers all over the world, with conveyer belts stretching for miles in huge 1.2 million square-foot warehouses (ABC News).
By 2008, Amazon operated physical locations, classified as distribution centers, in 17 sales-tax states. However, they only collected sales tax in 4 based on the claims by Paul Misener that these fulfillment centers don’t constitute a physical presence because they have nothing more than a “brother sister relationship” with Amazon’s retail business (Forbes).
Some states have been very lenient to the billion-dollar retailer, offering exemptions on sales tax in exchange for setting up presences in their states. In 2007, Indiana agreed to exempt Amazon from collecting the state’s 7% sales tax where Amazon now has 5 warehouses and have received more than $11 million in economic development incentives (Forbes).
In 2010, South Carolina Governor Mark Sanford, promised Amazon a break from sales tax until 2016 if they built a distribution center that would create 1,200 new jobs. The state legislator rejected the offer in April of 2011, causing Paul Misener to threaten taking the 1,200 jobs, and $100 million in capital investments, to another state. The South Carolina State Legislator quickly back-tracked, flip-flopping on their decision and ruling Amazon tax exempt until 2016 (Seattle Times) (South Carolina).
However, some states decided to take a more aggressive approach to enforcing the collection of sales tax from online sales. New York took the first step in tightening the loophole for nexus and affiliate locations in other states by passing what has come to be known as the “Amazon law.” The law draws attention to independent companies in various states that share links to larger companies, like Amazon, on their sites. New York ruled that this “relationship with affiliates satisfies the requirement set down by the U.S. Supreme Court that states can require sales tax collections only from retailers with in-state property, employees, or independent sales representatives,” (Center on Budget and Policy Priorities).
Amazon quickly and fiercely responded by cutting ties with affiliates in 5 states that adopted this law costing thousands of people their jobs and family income. In 2011, California passed the so called Amazon law and Amazon swiftly cut ties with its 10,000 affiliates. Amazon then relented and agreed to start collecting the sales tax in 2012 and in return the state would get 3 new warehouses (Wiki).
One of the more publicized battles for taxes came in 2010 when Texas State Comptroller, Susan Combs, upon realizing that Amazon was operating a 630,800 square foot distribution center in the Dallas area, presented Amazon with a bill for $268,809,246.36 for uncollected taxes, plus penalties, and interest. Amazon responded by threatening to shut-down the distribution center costing jobs and income for the state. Eventually, Combs dropped the bill after Amazon agreed to start collecting sales tax in Texas just 2 months later, as well as building distribution centers, agreeing to invest $200 million and create at least 2,500 jobs for Texas (Fortune).
Through all of these fights, Amazon has come out with the advantage against their competitors. Amazon is starting to realize they’re fighting a losing battle. That’s why they started to support the proposed Marketplace Fairness Act. The reason for the quick shift on their position should seem rather simple. Amazon has realized that they’re fighting a losing battle and now that those states are actively pursuing sales tax collection and revenue from Amazon, they want to ensure that their competition has to follow suit, even if it means whipping out the face of small biz. While Amazon once claimed to be on the side of small business, they now want to prevent them from gaining the competitive advantage on them that Amazon enjoyed for years.
By the end of the year Amazon will be actively collecting sales tax from 13 states and then 17 states by 2016, which covers roughly half of the U.S. population. While Amazon’s lobbying over the last decade has fiercely been against small businesses being stuck with the undue burden of collecting sales tax on thousands on local jurisdictions, they have suddenly changed their tune. Did you know that Amazon transacts 10M every 90 minutes? The facts, however, remain the same. Amazon has an army of lawyers and accountants and they can navigate the complexities of the MFA, my business simply can’t. Why are we creating a playing field that favors billion dollar retailers and does away with America’s entrepreneurial corner businesses?