With its seemingly endless number of products, competitive prices and customer focused shipping practices, Amazon.com (Amazon) is truly a commercial force to be reckoned with. Headquartered in Seattle, Washington, Amazon.com is the largest internet-based retailer in the world and, as of 2015, has surpassed Walmart as the most valuable retailer in the United States. Amazon began as an online bookstore but has since broadened its range of products and now offers a wide assortment of goods and services.
For a number of years Amazon has been at the center of a controversy regarding the collection of sales tax from customers. Amazon sells and ships products to customers in every state throughout country but does not collect sales tax in every state. Since it is an ecommerce company, Amazon does not always have a substantial physical presence in the states in which it conducts business and so many state governments lack the capacity to compel Amazon to collect sales tax. Many state governments are attempting to pass legislation which would compel Amazon to collect the tax, but this may cause Amazon to simply cease conducting business in whichever state passes such legislation.
In May of 2011 legislation was introduced in Congress which, if passed, would settle the issue entirely. So far, Amazon has not taken a public stance on the bill.
State governments argue that Amazon possesses an anti-competitive advantage in the marketplace over traditional storefront businesses. And since storefront businesses are of course forced to collect sales tax Amazon should likewise be compelled to do the same. In other words, the sheer impact which Amazon has on state economies is reason enough to collect the tax even though Amazon doesn’t always maintain a strong physical presence in the states in which it conducts business.
State governments also have clear financial motivations to impose the tax as well, as sales taxes from Amazon transactions can add up to hundreds of millions of dollars per year in certain states.
In order for a business to be required to collect sales tax it must have a physical nexus in the state in question. Amazon contends that this physical nexus is either insufficient or nonexistent in many cases.
In order to sidestep the physical requirements, Amazon has created subsidiaries which are treated separately for tax purposes. Amazon also carefully monitors its relationships with affiliate businesses in order to make sure that its physical presence is kept to a minimum.
Both sides of the argument have a degree of merit. Amazon does make it difficult for many local retailers given its status as an internet-based company. But even if a given state passes legislation to compel Amazon to collect sales tax, Amazon may simply remove its activities from that state; this very thing has actually happened before on a number of occasions. Obviously, state governments would love the dramatic rise in revenue which would occur with the collection of sales taxes from Amazon transactions; and Amazon would love to avoid collecting sales taxes since doing so gives it a competitive advantage. Perhaps the matter will only be fully resolved at the federal level.
Image credit: Claudio Toledo
To learn more about how different business entities can help you save money view the following transcript on entity selection