SEATTLE -- To persuade Amazon.com to build a distribution hub in Tennessee, state and local officials offered a package of economic incentives that included free land, job-training assistance and more than $12 million in property-tax breaks.
It was a run-of-the-mill package for an out-of-state company promising to create some 1,400 jobs at two new warehouses by the end of 2011.
But Amazon sought more from the Volunteer State. Amazon policy chief Fred Kiga made a case for why the Seattle company should not have to collect sales tax from Tennessee customers once the warehouses are up and running.
At stake was Amazon's ability to continue offering Tennessee customers everything from books to bikes without making them pay sales tax - a significant price advantage over the local brick-and-mortar stores.
Whether Amazon should be able to give customers a sales-tax break has been a hot-button issue since the early days of online shopping and is especially contentious now that states are struggling to close big budget holes after the Great Recession.
Under a 1992 Supreme Court ruling, a state cannot require Internet retailers to charge sales tax on its behalf unless they have a physical presence in that state. What constitutes a physical presence is more complex than you might believe.
Amazon so far has avoided collecting sales tax in six states where it operates distribution centers. The company argues that, because the facilities are separate legal entities, they do not give the e-tailer a physical presence.
"We are having discussions right now with the state on this," Kiga, a former head of Washington's revenue department, told the Times Free Press in Chattanooga, Tenn., last month. "The distribution centers here are not retailers but rather drop-shippers."
Officials for Tennessee's revenue and economic-development departments declined to comment, citing a long-standing policy of not divulging tax information about a particular business. Amazon, which rarely talks about behind-the-scenes business practices, did not answer questions about its sales-tax plan for Tennessee. The state's newly elected Republican governor, Bill Haslam, who once ran the e-commerce business of Saks Fifth Avenue, seemed to agree with Kiga.
While acknowledging that untaxed online sales are a growing problem for cash-strapped states, Haslam said tax collectors should not "interfere with our recruiting of Amazon to Tennessee. That's a huge priority for us," he told the Times Free Press.
Amazon's tax states
Amazon collects sales tax in a handful of states where it does business: Kansas, Kentucky, New York, North Dakota and Washington. The six states where it distributes products but does not charge sales tax are Arizona, Indiana, Nevada, Pennsylvania, Texas and Virginia.
Amazon finds itself at odds also with the National Retail Federation. The trade group argues Internet-only retailers enjoy an unfair price advantage over traditional stores that collect sales tax, and it wants Congress to do something about it.
Although calls for closing the sales-tax loophole are not new, the retail federation believes it's finally making some headway with Congress. Why now? E-commerce companies did well during the economic downturn, posing more of a threat to brick-and-mortar rivals.
Amazon's sales rose 40 percent in 2010 to $34.2 billion. CEO Jeff Bezos announced recently that the company would use some of its cash to build at least seven new fulfillment centers this year to handle sales of more products.
"More sales are taking place online, but they're going untaxed," said Craig Shearman, vice president of government affairs for the retail federation.
Economist Bill Fox, who heads the University of Tennessee's Center for Business and Economic Research, estimates that states lose about $12 billion a year from untaxed online sales.
What's more, state and local sales taxes add 5 percent to 10 percent to a shopper's in-store purchases, so buying from an Internet-only merchant can offer significant savings.
"The local bookstore closes down, and the firm in Seattle keeps growing," Fox said. "If I can save 10 percent by buying something from Amazon, that's a strong incentive."
Rules for shoppers
Technically, Internet shoppers are supposed to report and pay for untaxed online purchases when they file their annual state returns, though few do.
Some states have argued that online merchants should have to collect sales taxes, but the e-tailers have argued that requiring them to navigate the varied rules and rates of more than 7,500 local taxing jurisdictions would be a nightmare.
And Congress may be unlikely to do anything that might be interpreted as raising or adding taxes.
