The Wall Street Journal is reporting today that Amazon.com (NASDAQ: AMZN) is likely facing additional sales tax challenges in eight states besides New York. The New York issue has been well-publicized, with the state imposing new rules that would make Amazon subject to sales tax there because of the presence of affiliates. Normally, sales tax must be collected by a retailer only if that retailer has nexus (usually a physical presence) in a state in which an item is sold. In the past, nexus generally meant that the company had physical operations there, so the change in New York law, which now includes the presence of affiliates, is a big change. But courts also have ruled that the physical presence test is not the only way to create nexus.
The new wrinkle in the sales tax issue has to do with the distributions centers Amazon has around the country. The WSJ says [subscription required] that there are eight states with Amazon warehouses or distribution centers, but that Amazon has avoided collecting sales tax in those states by operating the facilities as subsidiaries of the parent company. Sales tax laws have permitted this exception when a facility is part of a separate legal entity.
Experts say that Amazon.com might not meet this exception, however, and might get snagged if the taxing authorities determine that these subsidiaries are merely shells set up to avoid the tax laws. It has been pointed out that even when items are coming from the subsidiaries, the Amazon website still shows the seller as Amazon, which would seem to weaken the argument that these are truly separate entities.
A large number of internet-based companies are apparently collecting sales tax across the board, whether or not they're legally required to, in order to avoid problems down the road. As governments are greedy for more and more tax dollars, they're looking for any and every target from which to extract money. Sales tax on internet sales is an obvious one.
Amazon.com is in an interesting position. One of the reasons some customers do business with it is because they save money on sales taxes. This provides Amazon with a distinct advantage over brick and mortar operations that collect sales tax. Is this an issue of fairness, or government greed? I think it's a little bit of both.
Should Amazon.com start voluntarily collecting sales tax in all states to hedge against this issue, or would that just end up making the company look guilty and impacting sales down the road?
I have an idea: Amazon should try to figure out what percentage of its sales is a result of the sales tax savings customers get. If that number is large enough, it might make sense for Amazon to keep taking its chances. If there's enough profit in it, roll the dice and wait for individual states to pursue the company, and pay the toll only if it loses. Even if it loses, my guess it that Amazon will be able to negotiate down each tax bill it's assessed with, and will still come out on top. The greedy state governments will be happy to take a reduced amount as they're just eager to get their hands on any money they can.
Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.
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Reader Comments (Page 1 of 1)
7-17-2008 @ 10:37PM
Luis said...
Since Amazon started collecting sales tax on purchases being shipped to NY, I have dramatically reduce my shopping on that site. I hope the tax gets repealed because it is hurting the pockets of many individuals and families trying to stay afloat during these tough economic times.