What's at Stake in the Texas-Amazon Fight Over State Sales Taxes?

Amazon wants to sell books and other goods to Texans, but doesn't think it should collect sales taxes here because it doesn't actually conduct business in the state.

The state says the company's warehouse in Irving and the 120 people who work there and the city tax incentive it has enjoyed there are all evidence of a physical presence that requires Amazon to collect and remit taxes on its Texas sales.

The dispute isn't only about the giant online retailer. State officials say Texas is losing $600 million annually on taxable items purchased online. And as they work to close a budget gap of up to $27 billion, they're chasing every penny.

Comptroller Susan Combs says Amazon owes $269 million in sales taxes. The company says it will close its warehouse and fire its Texas employees if that's how the state is going to read the law. They're in the early stages of a legal fight over the money and the bigger question about who's required to collect taxes in the state. Gov. Rick Perry is in the middle. He wants the state's tax laws enforced, and he wants to keep jobs in Texas.

"That is a problem and I would suggest to you that we need to look at that decision that our comptroller made," Perry told The Washington Examiner last week. "The comptroller made that decision independently. I would tell you from my perspective that's not the decision I would have made.

"You couldn't go in and buy anything out of that store, and that, historically, has been the way we defined whether you pay taxes or not — if you had a storefront," Perry told the paper. "This obviously didn't have a storefront. It was specifically there to manage products that need to be shipped out."

But Katherine Cesinger, a spokeswoman for the governor, says now that he wants legislators to "clarify" the law and that his concern is over losing jobs in Texas. When pressed to say whether Perry thinks Amazon and other similarly situated companies should pay sales taxes or not, she side-stepped, saying that the decision on how to enforce it is up to the comptroller and that the Legislature ought to explore the issue. "The governor thinks that that is something under the jurisdiction of Comptroller Combs," she says. "But if there is any uncertainly regarding the law to do that, he's committed to clarifying that and working with lawmakers to do it. … We're still looking at it."

Jobs are at stake on the other side, too. Retailers who charge sales taxes employ thousands of Texans, and some of those sellers are in tough financial straits. Giving a price advantage to their out-of-state rivals doesn't seem fair, they argue. Amazon didn't answer requests for comment.

The legislative and political fight has all sides lobbying and lawyering up. Amazon has focused on the tax fight, leaving the legislative battles to Luis Saenz, a former campaign manager for Rick Perry who is the company's lone lobbyist in Austin. He's outnumbered by lobbyists for various trade groups and big stores. For example, Mike Toomey, the governor's former chief of staff, is working for parity between the different types of sellers. So is Eric Bearse, a former Perry speechwriter and spokesman.

The comptroller argues that the physical presence is the trigger — not whether the company operates a cash register in the state.

The difference isn't over the taxes owed, but over who should be sending them to the state. You might not know this, but if you buy something that's taxable in Texas, you owe the taxes whether the seller collects them from you or not. That's true for over-the-counter sales, mail-order sales or online sales. It's called the use tax, and it's the state's levy on purchases from companies that don't have a physical presence, or "nexus," in Texas.

If a company does have operations here — and nexus exists — it is supposed to collect sales taxes from customers and remit them to the state. The state pays retailers for their trouble giving them 0.5 percent of the sales taxes they collect to cover their costs.

The sales tax effectively raises the prices those retailers charge. If a $100 sack full of merchandise is ordered online, it costs $100. Purchased over the counter, it's $108.25, if you include the local sales taxes levied in most Texas cities. Shipping can be an add-on cost for online sales, but it's often waived. Brick-and-mortar retailers think that hole in state tax laws puts them at a disadvantage. They've formed a national association — the Alliance for Main Street Fairness — that's backing the comptroller's position in this fight. Other online sellers that do have nexus in Texas — Barnes & Noble, Lands' End and Apple are examples — already charge sales taxes when they're selling online to Texans. Each of those three companies has physical retail stores in the state (Lands’ End is affiliated with Sears, which has stores here).

Amazon does pay sales taxes in some states: in Washington, where the company is based, in North Dakota and Kansas, where it has call centers, and in Kentucky, where it processes returns (it collects sales taxes in New York, too, but is protesting that state tax in court). It has direct contact with customers in those spots. It has the fulfillment center in Irving, which pulls orders together and ships them, but doesn't handle retail sales. The company has about 120 employees working at the center and received tax incentives from the city of Irving to locate there. Its physical presence is the basis for the comptroller's claim that the company should be collecting and remitting taxes here.

The company's argument is that the Irving location isn't a storefront and doesn't establish the kind of physical presence the state's sales tax laws require. (Interestingly, Amazon does collect sales taxes on items from some publishers and vendors on its site.) They're at odds not only with the state, but also with other businesses.

"Our official position is that if you have a physical presence in the state, and employees in the state, you have nexus," says Dale Craymer, president of the Texas Taxpayers and Research Association, a business trade group that does research and lobbying on fiscal and tax issues. "The comptroller is basically taking the heat for doing what the law requires her to do."

Combs did an audit of the company and followed with a demand that Amazon pay $269 million in uncollected sales taxes for the four years from December 2005 to December 2009. The amount came to light in regulatory filings by the company late last year, and the fight has now gone to the lawyers. Amazon wants the state to share its audit of the company, and has started its challenge in the State Office of Administrative Hearings, a precursor to a full court fight.

"In September 2010, the State of Texas issued an assessment of $269 million for uncollected sales taxes for the period from December 2005 to December 2009, including interest and penalties," the company said in its 10-Q for the quarter ending September 2010. "The State of Texas is alleging that we should have collected sales taxes on applicable sales transactions during those years. We believe that the State of Texas did not provide a sufficient basis for its assessment and that the assessment is without merit. We intend to vigorously defend ourselves in this matter."

On Tuesday afternoon, a trio of Democratic legislators sent a letter to Combs (and copied it to the media) urging her to share her audit records with the company. "It seems fundamentally unfair to tax Amazon while refusing to let the company see the details of its own tax bill," they wrote. The three — Reps. Joaquin Castro of San Antonio, Jessica Farrar of Houston and Pete Gallego of Alpine — want to meet with her to talk about potential legislation to avoid future problems. On Wednesday, Combs answered with a letter (also attached) saying Amazon's lawyers asked for and received the details of her audit, and got some but not all of what it requested later under the state's Open Information Act.

Sales taxes are collected by sellers; use taxes are levied on the buyers. Drive to another state, buy a trailer full of furniture and bring it back to appoint your Texas home, and you're legally liable for Texas’ use tax on that purchase. The out-of-state retailer wasn't obligated to do the collecting, but you're still on the hook if the tax collectors want to hunt you down.

Most of the time, the collectors don't have the time to chase small deals like your dining room set. But if the state spots millions in sales that are going untaxed, the comptroller's job is to find them and tax them. In this case, Combs is saying Amazon had nexus and should be collecting. Failing that, they'll still have the use tax, should they want to hunt down book-readers all over Texas.

The laws over what constitutes "nexus" are fuzzy. Say there's a Starbucks where 30 people are downloading books purchased from Amazon onto their Kindles. It might look like a virtual line at the bookstore, but that's not enough to establish nexus.

New York and some other states have passed so-called "click-through" laws to capture some online sales taxes. Say you have a website and an out-of-state online retailer offers to pay you a referral fee for everyone who goes from your website to buy something from the retailer's site. A click-through provision in state law would label that as sufficient presence to force the retailer to collect sales taxes. Rep. Elliott Naishtat, D-Austin, filed legislation Monday (House Bill 1317) that would add a click-through provision to Texas law. If that passed, and if Amazon kept those affiliate agreements in place, the company would become a sales tax collector in Texas.

Colorado took a different route. Instead of requiring retailers like Amazon.com and Overstock.com to collect and remit sales taxes, that state requires out-of-state retailers to send the state and the customer notices of the sales. The customers are told they owe use taxes on the things they bought, and the notices to the state let Colorado tax collectors know who bought taxable things online without being taxed. That's being challenged on privacy and other grounds.

All of the local fights could evaporate if the states that collect sales taxes could agree on a set of standards and then get Congress to ratify their agreements. That's been in the works for years, but Congress hasn't passed a law enabling what is known in the business as the "streamlined sales tax." One reason is that big states — Texas, California, Florida, New York, Ohio, Illinois and Pennsylvania — haven't signed up. Doing so would require them to reach agreements on definitions of what's taxed and not. Are candy bars taxable when food is not? Cookies? Ice? To make a deal work, the states have to agree on the minutiae of sales tax law. And unless it's got a congressional sign-off, it would actually cost money to joint the compact. Texas and others have held off.

The rewards, though, could be great, especially at a time when states are struggling to balance their budgets and when many politicians across the U.S. have taken the no-new-taxes pledge. Signing an interstate sales tax pact wouldn't require any state to change its tax rates. But they'd pull in serious money by getting a deal that requires out-of-state sellers to do what the in-state sellers do now. In Texas, the comptroller estimates the state loses $600 million annually in online sales of taxable items.

That's a lot of money no matter what shape the budget is in. Given the state of state government economics now, it's enough money, perhaps, to overcome reluctance to line up Texas sales tax laws with those of other states, to lobby Congress to ratify the deal, and to help plug the state's gaping budget hole.

[Editor's note: After this story was filed, a group of Democratic legislators wrote their letter to the comptroller; we've attached it and added some detail about it to the story. And still later, Combs responded; we added some detail in the story and attached her response.]