Analysis: Amazon Faces Taxing Issues As The Pressure On E-tailers Mounts

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Since their inception, online-only retailers like

have enjoyed a competitive advantage by not being required to collect sales tax in most localities.

But that could soon change given the dire budgetary straights of states and the massive lobbying efforts of major brick-and-mortar chains.

At stake are billions of dollars in potential revenue for state and local coffers, and a more level playing field for storefront merchants who are steadily shedding market share to e-tailers.

Currently, Amazon collects sales tax in five states where it maintains “a physical presence,” as dictated by a 1992 Supreme Court decision, Quill v. North Dakota. The e-tailer is suing one of them, New York, and has taken retaliatory actions against states including Arkansas, Connecticut, Illinois, North Carolina, Rhode Island, South Carolina, Tennessee and Texas, for expanding the definition of physical presence to include facilities of subsidiaries and third-party affiliates who sell on its site. In addition to lawsuits, measures have included dropping local affiliates and closing or threatening to close or relocate distribution centers.

Amazon’s stance, as reiterated by founder/CEO Jeff Bezos at the company’s annual shareholders’ meeting last month, is that the burden of collecting sales tax for some 7,500 states and municipalities across the country is costly and impractical. Instead, the e-tailer said, it would welcome federal legislation that streamlines tax rules and administrative requirements across all jurisdictions.

Bezos believes such a measure is attainable within 10 years, although a move in that direction is already afoot. Sen. Dick Durbin, the Democrats’ assistant majority leader from Illinois, is the chief sponsor of the Main Street Fairness Act, which promises to simplify rules and tax rates and reduce collection costs. While the bill is backed by a number of powerful retail lobbying groups, including the National Retail Federation (NRF) and the Retail Industry Leaders Association (RILA), it will likely prove unpopular with a recession-weary public, making its near-term passage problematic.

Meanwhile, a recently formed coalition of big-box chains called Alliance for Main Street Fairness (AMSF) continues to apply pressure at the state level. The group, whose members include Best Buy, The Home Depot, Sears, Target and Walmart, purports to have the welfare of small businesses in mind, although many of the founding chains themselves have been vilified for hurting independent dealers and local economies.

What impact a blanket tax policy would have on Amazon is unclear. Credit Suisse analysts estimated that such legislation would have trimmed nearly 3 percent, or some $650 million, from the company’s forecasted 2011 revenue in North America.

But analysts at Wells Fargo Securities found that Amazon’s prices are, on average, 5 percent to 6 percent lower than Walmart’s and 12 percent to 13 percent lower than Target’s before tax savings are factored in. Bezos himself noted that the company already collects taxes in about half the places in which it does business around the world, while industry observers believe that removing the tax loophole would only free up Amazon to open more distribution facilities in major markets to further reduce delivery time and increase share.

So tax or no tax, Amazon is clearly here to stay.


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