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 nations 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.
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