Amazon’s Exit Spurs Tax Fight in Texas

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(by Ana Campoy, The Wall Street Journal, WSJ.com) DALLAS – The planned closure of an Amazon.com Inc. distribution center in a suburb here has opened a debate about whether taxes or jobs is the better answer for Texas’ tattered budget.

The online retailing giant said last week that it would close its center in Irving [Texas] due to a dispute with the state comptroller, who is demanding that Amazon pay $269 million in sales taxes it should have collected on goods sold to Texas residents.

Comptroller Susan Combs, a Republican, said she was disappointed to see the facility’s 119 jobs go, but her duty was to collect.

That position had caused discomfort for Gov. Rick Perry, who promotes his policies as job-creating. In a rare public disagreement with a fellow Republican, he said Ms. Combs made the wrong call.

“The governor was not happy with the outcome,” of the tax fight, said Katherine Cesinger, a spokeswoman for Mr. Perry.

The disagreement comes as state legislators try to tame Texas’ budget deficit, estimated at $15 billion to $27 billion.

As other states grapple with their own shortfalls, the pressure is rising to generate tax revenue from online purchases.

The Supreme Court ruled in 1992 that businesses without a physical presence in a state are not obliged to collect taxes on the goods they sell there.

Since then, states have been trying to get Congress to change the law or have been seeking a way around it. A coalition of states has lobbied Congress to force online retailers to collect some taxes-so far without success. Some states, including Illinois and New York, broadened the definition of “physical presence” to include online retailers who pay commissions for referrals by local partners. Illinois lawmakers recently passed a similar bill, which awaits the governor’s signature. Amazon has responded to the various laws with lawsuits or by cutting ties to the local businesses.

The uncollected taxes of goods sold online and through catalogs amounted to $8.6 billion in 2010, according to the National Conference of State Legislatures.

With its Irving warehouse, Amazon is considered to be doing business in Texas and is required to send in sales taxes for items it sells to state residents, Ms. Combs has argued. Last September, she sent Amazon a bill for taxes she said the company failed to collect from 2005 to 2009.

Amazon declined to comment, but in filings with the Securities and Exchange Commission, it has described the comptroller’s argument as without merit. In January, the company sued Texas, demanding documents related to the comptroller’s calculations, but the comptroller said those documents are not public.

But Mr. Perry seemed to side with Amazon when he told the Washington Examiner in an interview that having a store front historically had determined whether a company had to collect taxes. “This obviously didn’t have a store front,” he told the newspaper of the Amazon center on Friday.

More recently, he called for the clarification of the state’s tax laws “to further strengthen the reliability of our tax system and to protect Texas jobs,” according to Ms. Cesinger, the spokeswoman.

One state legislator sought to settle the matter. Rep. Elliott Naishtat, a Democrat from Austin, introduced a bill this week that would require online retailers that sell more than $10,000 in Texas through referrals by local partners to collect taxes for the state.

Mr. Naishtat said in an interview the bill is “a possibility of generating hundreds of millions of dollars in a time of critical need.” Mr. Perry hasn’t publicly indicated a position on Mr. Naishtat’s proposal.

In the meantime, Ms. Combs is not backing off her fight with Amazon, which is pending in the State Office of Administrative Hearings. She said the state loses $600 million a year in uncollected tax revenue from online sales. She has said she has demanded back sales taxes from some other online outfits, but declined to identity them.

“To make an exception in this case would create an unfair advantage for Amazon,” said Allen Spelce, spokesman for the comptroller’s office.

Write to Ana Campoy at ana.campoy@dowjones.com.

Questions

1. Find the tax rates for your state from the links provided below under “Resources”, and list the rate for the following taxes:
a) individual income tax
b) property tax
c) sales tax
d) gasoline tax
e) corporate (business) tax

2. A comptroller (aka controller) is defined by Merriam-Webster Dictionary as a public official who audits government accounts and sometimes certifies expenditures [okays the money spent by the government] Explain how Texas’ comptroller caused an Amazon.com distribution center outside of Dallas to close. Be specific.

3. Why doesn’t Amazon.com collect sales tax from purchases made through their website?

4. a) What have some states including Illinois and New York done to get around the Supreme Court’s 1992 ruling? (see “Background” below for explanation)
b) How has Amazon responded to the strategy taken by these states?

5. a) What is a budget deficit?
b) What is the government’s main source of income to pay for the budget? (From where do state governments get over 95% of their money?)

6. According to the National Conference of State Legislatures, how much could states have collected from sales made online and through catalogs in 2010?

7. Many consumers will purposely buy larger items from websites such as Amazon to save on the sales tax (as opposed to Wal-Mart, Target, Sears, etc. where they would have to pay the sales tax). Given the fact that it has a presence in the state through its distribution centers, does this give Amazon an unfair advantage in Texas? Explain your answer.

8. a) What is more important to you in your state: increasing jobs (even if it means losing sales tax revenue from companies like Amazon) or increasing tax revenue for the state (even if it means losing jobs in companies like Amazon that decide to leave the state due to taxes)?
b) If you answered jobs, how should a state handle the lost sales tax revenue? (think about this: if the consumer can’t buy the product from Amazon or another online retailer, they would purchase the product through Wal-Mart, Target, etc. and pay the sales tax)
If you answered taxes, how should a state create an environment to lure businesses/keep jobs?

9. a) Why do you think Governor Perry of Texas is siding with Amazon? What is Governor Perry’s responsibility to citizens and other businesses located in Texas to treat businesses equally?
b) Ask a parent the same question.

Background

The Supreme Court ruled in 1992 that businesses without a physical presence* in a state are not obliged to collect taxes on the goods they sell there.
*A physical presence is an actual building or office, as opposed to just a website that people visit.

Some states, including Illinois and New York, broadened the definition of “physical presence” to include online retailers* who pay commissions for referrals by local partners.

*Online retailers [Amazon.com] who pay commissions for referrals by local partners – it works like this: a local partner recommends a particular product: a book, electronic gadget, ect., and provides a link to Amazon.com on their own website. If the user of the local partner clicks on the link to Amazon and buys the product, Amazon gives the local partner a small commission on each item it was able to get its visitor to purchase.