Amazon.com (NASDAQ:AMZN) CEO Jeff Bezos won a victory in his battle against California’s Internet sales tax law, though he may still lose the war.
According to media reports, the largest Internet retailer got a one-year reprieve from having to collect sales tax from California customers. This will give the company the additional time to lobby Congress for a federal solution to the problem of collecting sales taxes on Web sales.
At the same time, however, Amazon will need to spend millions updating its computer systems to make sure that the tax is eventually collected and accounted for properly. The California tax will shave about 5% from Amazon’s sales next year, according to one analyst.
Bricks-and-mortar retailers have complained bitterly for years that Amazon and other web-only companies, including eBay (NASDAQ:EBAY), enjoy an unfair advantage because they don’t collect sales tax from most of their customers. Amazon’s rivals now have a powerful ally in state and local officials, who in recent years have been forced to lay off teachers, police officers and firefighters as state tax revenue aid from the federal government dried up.
Shares of Amazon were down nearly 3% on the news about California, as well as the market’s broad selloff. And they will go down even further if the Seattle-based company is unable to convince Congress to address the sales tax issue in a manner that it likes. It has until July 2012 to do it, which, given the glacial pace how Washington works, isn’t that much time.
Amazon, though, does have some friends in its corner such as the Tax Foundation, a conservative think tank, which argues that Amazon taxes that have been enacted have been failures.
“Amazon taxes do not provide easy revenue,” The Tax Foundation’s Joseph Henchman wrote in a blog post last year. “In fact, the nation’s first few Amazon taxes have not produced any revenue at all, and there is some evidence of lost revenue.”
Some of those poor results may be the result of Amazon’s decisions to end relationships with affiliates in some states that require the collection of sales tax from all Internet purchases. Amazon counters that these laws contradict rulings from the U.S. Supreme Court that hold that only companies with a “physical presence” in a state can be forced to collect sales tax. Legislation in Congress is pending to close that loophole. About $10 billion in tax revenue may be at stake.
By reversing course in California, Amazon has acknowledged the inevitable fact that it will have to collect sales tax at some point in all 50 states — and in many localities as well. It tried to bamboozle California officials into abandoning the idea in exchange for opening two distribution centers that would employ thousands. The state – which expects to net $200 million annually from the Internet sales tax– wisely told Amazon “no.”
Amazon now has to figure out whether it will reinstate the affiliates whose relationship with the company ended after their states passed Internet sales tax laws. It also must decide whether to continue its fight against New York’s law.
Many people don’t realize that the Internet has never been a tax-free zone. Customers of Amazon and other ecommerce sites are supposed to pay use tax to their own states, though few bother doing it. Even Amazon collects the tax in a handful of states where it does have a “physical presence.”
Jonathan Berr has no shares in any of the aforementioned stocks. Follow him on Twitter @jdberr.
