American Independent Business Alliance

Amazon’s Physical Presence (Nexus) in States and the Sales Tax Battle

Amazon’s Physical Presence (Nexus) in States and the Sales Tax Battle

Executives at Amazon.com long argued the corporation should be exempted from sales tax collection duties in states where it has no physical presence (referred to as nexus in law) because it receives no benefits from those states (an argument we rejected). For a more detailed explanation of nexus, refer to this page from the Institute of Local Self-Reliance.

In 2012, the corporation changed course. Realizing that continued growth would require faster shipping times, the company embarked on a construction of new fulfillment centers across the country and offered support, at least in public statements, to nationwide reform that would close the online sales tax loophole. Amazon is also opening brick and mortar book stores in the U.S., starting with Seattle in 2015. Stores in San Diego, Chicago, Portland and Boston are planned as of 2016. Amazon’s physical presence in states, either via fulfillment centers or stores, will require it to charge state sales tax.

Of course, Amazon is not the only online mega-retailer exploiting this loophole. See “Best Resources on State Sales Tax and Reform of Internet Exemption” for dozens of sources covering the issue more generally. For notable reporting on this topic, see the “Subsides and Sales tax Avoidance” section of our All About Amazon collection.

Note: While Amazon has long proclaimed support for national sales tax reform, for many years its lobbyists pushed to eliminate exemptions for retailers that sell small volumes online (Amazon wanted businesses with as little as $150,000 in annual sales to collect sales tax on interstate transactions). Since all major proposals exempt businesses up to $1 million in sales, this effectively was opposition to passage of any reform. As of 2013, Amazon seemed to be changing its position on the exemption.

While obstructionism is one potential motivation, we also suspect Amazon aims to become a/the major provider of sales tax administration services to small businesses. The lower the threshold and the larger the number of small businesses forced to collect sales tax, the greater Amazon’s potential new profit channel. Meanwhile, two legal scholars writing for State Tax Notes recently argued the special deals cut by some states to exempt Amazon from sales tax collection are unconstitutional.

Amazon isn’t shy about exploiting its advantage; the company previously generated a firestorm by encouraging customers to exploit physical retailers as showrooms, then purchase from Amazon.

Richard Prem, Amazon’s VP for Indirect Taxes and Tax Reporting, told a conference of state tax officials: “We don’t consider [not collecting] tax as a competitive advantage.” The corporation’s 2008 Annual Report (p. 14) rebuts his claim:

“A successful assertion by one or more states or foreign countries that we should collect sales or other taxes on the sale of merchandise or services could result in substantial tax liabilities for past sales, decrease our ability to compete with traditional retailers, and otherwise harm our business.”

Interested in the broader sales tax dispute? See “Best Resources on State Sales Tax and Reform of Internet Exemption

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