More Questions About Amazon.com and Sales Tax

The latest column by Wall Street Journal writer Lee Gomes takes a close look at what he characterizes as "an audacious legal strategy Amazon.com has used to avoid collecting sales tax" in some states where it has warehouses or distribution centers.

The June 25 column -- "Will Amazon Get a Visit From the Tax Man? [1]" -- details the legal argument made by Amazon.com that distribution facilities shipping Amazon.com orders to customers are not under its control, but, rather, that they are the operations of a company that is a wholly owned subsidiary of Amazon.com. As Gomes notes in his column, courts have allowed companies to set up subsidiaries that are legally separate entities, but they have also rejected "shell companies" that exists solely to avoid tax obligations.

The question is important because the law is clear that if a company has a physical presence in a state -- that is, nexus -- then it has a legal responsibility to collect sales tax. The State of Texas Comptroller's Office is currently investigating [2] whether the presence of an Amazon.com-run distribution facility in the Dallas suburb of Irving means the online retailing giant has a physical presence in the state, and Gomes notes in his column that "several tax experts say Amazon's legal case appears to be a weak one." Amazon declined to respond to questions from Gomes for his column regarding tax-related issues, including the sales volume of its warehouses.

Amazon.com's runs fulfillment facilities in Kentucky, Pennsylvania, Kansas, Texas, Nevada, Delaware, Arizona, and Indiana. The company lists customer service centers in North Dakota, West Virginia, and Washington. At present, Amazon only collects sales tax in Kansas, Kentucky, North Dakota, and Washington. Delaware does not charge sales tax.

Since June 1, Amazon.com has also been collecting sales tax in New York State, following the state's passage of the Internet Sales Tax provision in the state budget. The provision's approval came following a sustained lobbying effort by the state's independent booksellers, ABA and the New Atlantic Independent Booksellers Association, the Retail Council of New York State, and other state independent businesses. Amazon.com has mounted a legal challenge to the provision, as has Overstock.com [3]. The case, which will be heard in New York Supreme Court, is slated to begin on Monday, July 7.

Gomes quotes in his column tax experts who call into question Amazon.com's legal justification for a separate legal status for its distribution and shipping facilities. They note that there are questions regarding whether the subsidiaries Amazon.com has established "are really the independent units envisioned by the tax law." The company's website simply notes that Amazon.com has "offices, fulfillment centers, customer service centers, and software development centers across North America, Europe, and Asia" and lists its fulfillment centers. There is no mention of any subsidiaries, and, as reported by BetaNews, Amazon.com was listed as the owner of its distribution center in Texas in 2006 and 2007, not its subsidiary, Amazon.com.kydc, Inc.

In addition, Gomes points out that the U.S. Supreme Court has ruled that a company's presence in a state does not have to be a physical one for it to have a responsibility to collect sales tax. "A close relationship with third-party contractors in the state might be enough to constitute such a presence, the top court has said." Gomes quotes Virginia tax commissioner Janie E. Bowen regarding the question of how much control an out-of-state company has on the operations of the in-state facility -- "if it looks like a shell company, then we would take a serious look."