Updates on Amazon’s Place in the Nexus

Being by far the biggest and best in a particular market, means having a big part to play in the development of that market. In the case of Amazon, they dwarf the vast majority of online retailers, and being the market leader, have a big part to play in the developing sales tax issue. There have been a been a number of updates across different states which help chart the course of an eventual decision on how sales taxes will be imposed long term.

Texas

First, the defining characteristic of the sales tax argument is whether a retailer has a physical presence in a state, which would then qualify for the collection of taxes. States have progressively pushed to extend how this reach can be thought of,  thereby creating a nexus. In the state of Texas, this has recently brought about by legislators looking to expand who is part of this nexus. First Amazon was pulled into the fray because of a large distribution facility they have in the state. The facility is owned by an Amazon subsidiary, not directly by Amazon, so Amazon’s argument is that sales taxes are not owed. However, the bill being pushed would extend a nexus to related companies, in the same manner affiliate marketers have been targeted before.

As a temporary reprieve, the Texas governor vetoed the bill because the scope could have been extended to a company using just a server in Texas, thus being enough to establish a nexus. Fortunately the governor had enough incite to see the impact on technology companies in the state, so the bill has been vetoed. Right now it’s a safe assumption a modified version of the bill will be passed however, the Amazon fulfillment center will not have a future, Amazon affiliates will get the blocked out in the state, and technology companies will be safe to some extent while online marketers will feel the brunt.

South Carolina

Speaking of fulfillment centers. Amazon is coming to South Carolina with $125M to invest in a new fulfillment center creating 1200 new jobs. Of course being caught in the cross hairs of the nexus argument, Amazon has made sure to have the sign-off of the state government, which has extended a provision which will give Amazon tax breaks on their property as well as a 5 year exemption on sales taxes based on having a physical location in the state. The interesting aspect of this, beyond South Carolina really trying to get some economic activity going in the state, is that this signifies Amazon believes the subsidiary argument is no longer one which states will accept, and they are being very strategic by placing the fulfillment center in state which has a minimal amount of instate purchases, which would then be vulnerable to taxes in 5 years. There is also a chance this indicates Amazon believes the tax argument may be settled in the next 5 years, but that’s a guess at best.

Tennessee, Arkansas, Connecticut, and California

For quick notes on other states, Tennessee is targeted for a new fulfillment center from Amazon as well . Tennessee was pushing a sales tax bill, but has deferred based on the potential Amazon investment in the state. In Arkansas and Connecticut, Amazon has cut off their affiliates because of recently passed bills which force the collection of taxes based on a nexus created by these marketers. California affiliates are likely next in line, as California has recently passed a bill of their own to impose a sales tax collection.

The good thing about California’s bill, is they put together some neat facts in presenting and passing the bill. This includes facts like California estimates it could have collected $795M in taxes in 2010 from online sales, $83M could have come from Amazon alone, California residents spend 1% of their personal income on online purchases, and the top 500 online retailers own 94% of all online sales. Interesting tidbits, at least proving research can be well conducted.

Overall, the wave is building, but the various different efforts here resemble the United States in the early days of the union under the Articles of Confederation. Then states did business separately, printing their own money, charging tariffs on interstate trade, and generally proving that states (or perhaps even countries) when acting separately on their own, are not truly acting in their own best interests because acting in unison can be produce much more profit for everyone.

Speaking a few days ago at an Amazon shareholder meeting in Seattle, Jeff Bezos (CEO, Amazon) said, “The right solution to sales tax in my view, and certainly this is Amazon’s position and its been consistent and we’ve had this position for 10 years, is that the right place to solve this is federal legislation…There is an initiative called the simplified sales tax initiative. 22 states have already signed on. That legislation needs to get passed…Keep in mind, in more than half of the geographies where we do business in certain states as well as Europe and Asia, altogether, more than half of our business is in jurisdictions where we already collect sales tax or its equivalent, like the value-added tax.”

Essentially having a unified tax structure creates many benefits. The most immediate impact is that there is a level playing field not only for physical stores, but also for online marketers who are being hurt based on the state they reside in. Also, it creates a simplified structure, where if instead individual states continue to define their structure, a consumer could possibly be asked to pay sales tax in several states, based on an affiliate in one state leading to a sale, a fulfillment center in another state sending the item, and then the retailer having it’s main operation in another state. Under this scenario, 3 separate states could request sales tax be paid, leading to a cluster of overlapping interests and laws. The call for federal, and hopefully  international agreement, should continue to grow and hopefully bring some clarity that will help the expansion of business, rather than hinder through confusion and disagreement.

June 14th, 2011