Amazon seeks a tax reprieve

September 8, 2011 03:22 PM

California state legislators and Inc. have forged a tentative agreement that would exempt Amazon and possibly other online retailers from collecting sales tax from California residents for a year, state officials say.

Amazon has agreed in return to drop its push to put a referendum on a state ballot next June that would let voters decide whether to overturn the existing sales tax law that went into effect in July. The retailer has also agreed to step up lobbying efforts for a federal law that to create a nationwide system of sales tax collection by Internet and catalog retailers, state officials say. If a federal law isn’t enacted by next year, Amazon would start collecting the California sales tax.

Amazon, No. 1 in the Internet Retailer Top 500 Guide, declines to comment.

Amazon’s willingness to cut a deal with California coincides with increasing pressure the retailer faces from lawmakers in several states as well as from the media, says Daniel Schibley, a state tax analyst at CCH Inc., a unit of Wolters Kluwer that publishes tax and business information. “For the last few months, Amazon has been taking a lot of hits in the press and among state lawmakers for its sales tax policy,” he says. “This seems to reflect a recognition that it’s probably not in the company’s long-term interest to keep fighting this battle with the states.”

The tentative deal follows Amazon’s offer earlier this week to build distribution centers and add thousands of jobs in California in exchange for a two-year exemption from state sales tax collection.

The proposed deal, which would make the earlier offer moot, must be put before a vote of both houses of the California State Legislature before midnight Friday, Sept. 9, the last day of the current legislative session. Legislators were planning to submit a bill with an “urgency clause,” which would require a two-thirds vote of both the state Senate and Assembly. If passed that way, the legislation authorizing the deal would become effective immediately. Without the urgency clause, the bill would not go into effect until January.

However, there’s no guarantee the deal will win the necessary votes from California’s Republicans, who are not involved in drafting the bill’s final language. Although Democrats control both houses of the State Legislature, they need at least two Republican votes in the Senate and six in the Assembly to get a two-thirds victory margin, says a spokesman for Sen. Bob Dutton, the Senate’s Republican leader, who has been credited with initiating the talks that led to the tentative deal with Amazon.

A spokeswoman for Assemblywoman Connie Conway, the Republican leader in the Assembly, said that because Assembly Republicans had not yet seen a legislative proposal as of this afternoon, she would not comment on the deal.

For Amazon, the negotiations this week mark a sharp turn from its previous response to states that have passed online sales tax laws. In California and other states Amazon has severed ties with affiliate web sites rather than collect sales tax under sales tax laws that requires online retailers to collect the tax if they receive referral traffic from in-state affiliates, such as blogs and other information sites. The California law that went into effect last month also requires online retailers to collect sales tax if they have in-state subsidiaries that operate distribution centers and other facilities. In effect, such state laws provide states with a way around existing federal law that says states can mandate sales tax collection only by retailers with an in-state physical presence, or nexus in legal terms, such as stores and distribution centers.

A federal bill submitted this summer by Sen. Dick Durbin (D-IL), the second-ranking Democrat in the U.S. Senate, would authorize states that have simplified their tax polices under the Streamlined Sales Tax Project to require all retailers to collect sales tax, whether or not the merchants had an in-state physical presence. The Streamlined Sales Tax Project is an effort to simplify state sales tax laws to make it easier for retailers to collect sales tax across multiple states; more than 20 states take part.

It’s not clear how Amazon’s California deal might impact the chances of that bill winning support in Congress, Schibley says. On the one hand, Durbin’s bill—the Main Street Fairness Act—would benefit from the deep pockets of Amazon in lobbying efforts. But, on the other hand, Schibley adds, California’s large congressional contingent might be less enthusiastic toward the Durbin bill if they think their state will get more tax revenue next year whether the federal bill passes or not.




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