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Brier Dudley offers a critical look at technology and business issues affecting the Northwest.

May 16, 2011 at 10:27 AM

Amazon sales tax spat: Time for new approach?

It may be time for Jeff Bezos to wander down the beach in Medina and ask his neighbor Bill Gates for some advice on damage control.

Perhaps Gates could tell him over a soda or two, as they watch the sun set over Seattle, that it’s not worth being pushy or stubborn when you’re on the hot seat and the nation’s watching. is facing a huge government battle that could approach the scale and long-lasting effect of Microsoft’s epic antitrust challenge.

This fight is over whether Amazon — the largest online retailer, by far — should collect the same sales taxes as local retailers. Right now, it collects taxes in only five states, including Washington.

States have grumbled for years about people bypassing sales taxes by shopping at Amazon and other online stores. They’re losing up to $12.6 billion a year this way, according to a University of Tennessee study.

Now the states are at a breaking point, struggling with huge deficits and declining revenues. On top of that, people are doing more shopping online, reducing local business activity and sales-tax receipts.

For their part, online stores claim they’re exempt from collecting taxes in states where they have no physical presence. They’re relying on a 1992 Supreme Court ruling, which favored a mail-order company that didn’t want to collect sales taxes in North Dakota. That case built on a 1967 ruling in favor of another mail-order business.

Justices acknowledged the “physical presence” rule gave mail-order companies an advantage, but said it was important to clarify when and where states could collect taxes.

“Indeed, it is not unlikely that the mail-order industry’s dramatic growth over the last quarter century is due in part to the bright line exemption from state taxation” created in the 1967 case, they wrote.

Since the nation began, there have been concerns about conflicting state tax laws interfering with interstate commerce. Clarity in this area helped keep the states united and prosperous.

But perhaps it’s time for a more contemporary interpretation that takes into account the scale, effect and presence of online retail.

It seems reasonable to think of Amazon as establishing a storefront locally on your computer, where it uses the local infrastructure to conduct transactions and local roads to deliver merchandise.

It’s silly nowadays to argue it’s a burden for online companies to figure out the different tax rates.

It’s a snap for Amazon to figure out how much tax each customer owes, based on their billing address. The company already calculates this in some states and on behalf of merchants that use its retail platform.

If Amazon can’t figure this out, a Bainbridge Island company called Avalara offers software that does sales-tax calculations instantly for all sorts of companies.

The dissenting justices in the 1967 case said it best. Writing long before the PC arrived, they said fretting about the tax complexity facing interstate businesses “vastly underestimates the skill of contemporary man and his machines.”

A coalition of 24 states, including Washington, is trying to take complexity out of the equation by streamlining and aligning their sales taxes. There’s been talk in this group of pursuing a lawsuit to overturn the 1992 ruling, said Dan Schibley, a state-tax analyst at CCH, a publisher of tax research.

Some in Congress repeatedly have tried to introduce a federal rule setting a standard for collecting online-sales taxes. The latest was proposed last month by U.S. Sen. Dick Durbin, D-Ill., but he’s yet to formally introduce his Main Street Fairness Act. His office said Friday the bill should be filed in a few days.

Amazon executives have said the company favors a nationwide approach. On Friday, spokeswoman Mary Osako reiterated this position with a statement: “We’ve long supported a truly simple, nationwide sales tax system, evenhandedly applied.”

But this is kind of like saying you favor a blue moon. Amazon knows bills like Durbin’s have a slim chance. Similar bills failed in the past five or six sessions of Congress, Schibley said.

“In Congress, the problem is that it’s perceived as a tax increase, even though it’s technically collecting a tax that’s already owed,” he said.

Amazon isn’t acting like a company that’s ready for progress on the tax front. It’s fighting like a wolverine in states that have found ways to collect some taxes.

Six have passed laws to collect from local Amazon affiliates — websites that get a commission for Amazon sales made through their sites. Amazon responded by cutting the affiliate program in Illinois and suing to block the legislation in New York.

At a conference last week, Bezos said the company will continue cutting affiliate programs in states where such laws are passed.

Amazon also is trying to get around the physical-presence rule in other states. In South Carolina, where Amazon was locating a distribution center, it demanded a special exemption from sales taxes. The company was given free land there for a center that would employ 1,249, but it abandoned the partly built facility after lawmakers voted against the tax exemption last month.

Earlier this year, Amazon decided to close a distribution center in Texas and drop plans for additional facilities there after the state tried to collect $269 million in unpaid sales taxes.

This seems like a million miles away from Washington state, where Amazon always has collected sales tax because it’s based here. Washington is grateful for Amazon’s presence and all the smart people it’s bringing here.

Amazon is thriving in this climate, but I shudder to think what might happen if our state ever crosses its path.

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