Amazon Offers Texas a Big Deal to Delay Internet Sales Tax Law

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Amazon taxes has offered a $300 million investment and the promise of 5,000 jobs in the state of Texas in exchange for the state postponing legislation that would force the online retailer to begin collecting sales tax on purchases made by Texans.

According to one source, top officials in the Texas legislature and governor's office are weighing Amazon's (AMZN) offer. The terms of the deal are strikingly similar to one accepted by South Carolina earlier this month -- 2,000 jobs and a $125 million investment in a distribution center, in exchange for which the state will allow it to postpone collecting sales taxes until 2016.

In Texas, where folks say everything is bigger, Amazon's offer to build distribution centers and hire workers is larger too -- if the Lone Star state is willing to delay its Internet tax collection requirement until 2016, said one government official.

This sort of wheeling and dealing in exchange for a tax exemption is not all that uncommon, says Diane Yetter, president of sales tax consulting business Yetter Consulting Services in Chicago. She noted that years ago, Federal Express struck a deal with Tennessee to hire a specific number of people and invest in a new distribution facility, in exchange for a sales tax exemption on purchases of new equipment that went into the building.

"Most states have enterprise zones where companies can locate there and receive tax exemptions," says Yetter. "The states are hoping to capture lucrative property tax or state income tax from those employees." However, she notes, "with Amazon's offer, it's flow-through money. Texas does not require individuals pay income tax, so all these people Amazon plans to hire won't contribute in that way. Texas, in part, may be looking to do this for the [public relations] benefit, or part of political jockeying."

Although Amazon did not return calls seeking comment, the e-commerce giant may be banking on the hope it can strike similar deals with others from the growing number of states that have introduced and passed "Amazon Tax" legislation this year.

An Unfair Advantage for Online Retailers

Convincing those states to delay implementing their legislation by nearly five years may also buy Amazon time to try to win its court battle with New York, where it hopes to avoid setting a legal precedent that would require it to collect sales tax on online purchases made through any of its affiliates.

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New York took a novel approach in its approach to the tax issue in order to get around a 1992 U.S. Supreme Court decision, Quill v. North Dakota, which says states can only collect sales tax if the retailer has a physical presence in the state, like a store or distribution center. But New York argues Internet retailers that rely on other websites or affiliates also have a presence in the state where the affiliate operates. New York takes the view that affiliates are de facto storefronts, allowing a retailer to transact a sale once a user clicks on their advertisement on the affiliate Web site.

Brick-and-mortar competitors complain that their online rivals have an unfair advantage, noting they are able to sell their items at lower prices because their customers aren't paying sales tax -- which, they say, is costing them revenues and forcing them to lay off workers. Although consumers are required to pay sales tax on their Internet purchases, many do not. And the money that goes uncollected is huge -- with some estimates reaching $23 billion in uncollected sales tax by 2012.

Amazon, however, has threatened and has terminated its relationship with its affiliates in states where "Amazon Tax" legislation has passed. Earlier this year, state Rep. Nancy Skinner introduced AB153 in the California state legislature, calling for out-of-state retailers like Amazon to start collecting online sales tax. Affiliates, as well as brick-and-mortar retailers, turned up en masse to voice their concerns at a recent hearing over the bill.

California's House of Representatives has passed AB153, and it's scheduled to be heard on July 6 in the state senate's governance and finance committee. Amazon has yet to make a similar offer in California, said one government source. Currently, Amazon does not have a distribution center in the state, nor does it have one under construction.

In the meantime, California, like other states pushing their own versions of the "Amazon Tax" laws, hope to shift the burden of collecting Internet sales tax onto the online retailers themselves, similar to the way they are collected at a brick-and-mortar checkout counters.

As Yetter previously noted: "If everybody paid the sales tax that's due, the states' budgets wouldn't be as bad as they are."

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