Paul L. Caron

Thursday, June 26, 2008

Tax Profs Fault Amazon's "Audacious" State Tax Strategy

Wall Street Journal:  Will Amazon Get a Visit From the Tax Man?, by Lee Gomes:

New questions are being raised about an audacious legal strategy has used to avoid collecting sales tax in eight states where it has warehouses or distribution centers, including populous ones such as Pennsylvania and Virginia. Texas has been examining the issue since May.

As an online retailer, Amazon can avoid collecting sales tax in states where it has no presence, at least until Congress changes the law. But in states where a company has actual facilities, such as warehouses, states tax officials can require the company to collect sales tax.

Despite operating hundreds of thousands of square feet of distribution facilities in the eight states, Amazon says it doesn't have any presence in them. The company argues that it doesn't operate the plants, its wholly owned subsidiaries do. ...

Tax experts say Amazon's case is weak in two ways. First, it's questionable whether the subsidiaries Amazon has set up are really the independent units envisioned by the tax law. ... Second, the U.S. Supreme Court has ruled several times that a "presence" in state doesn't have to be a physical one before a company has a sales-tax collection responsibility. ... Amazon's relationship with its subsidiaries thus could be held to be sufficiently close, even if the companies are found to be independent of each other. ...

Walter Hellerstein, of the University of Georgia law school and the author of tax-related law-school textbooks, says the facts in the case are "very strong for the states.""I would say that is high-risk behavior for Amazon not to collect the tax," he adds. "I would think they are going to lose."

John A. Swain, a University of Arizona law professor who has extensively researched this set of tax issues, adds that companies typically lose these sorts of "entity isolation" cases, except where the state hasn't done its homework

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Tracked on Aug 24, 2009 5:59:39 AM


I just moved to PA, and I am near one of their facilities (the signage even reads, a no-no to me). I also saw some commentary from some of the PA Economic Affairs types announcing incentives to amazon to build/expand facilities and hire workers. My guess is PA isn't going to be the state to push attributional nexus for use tax collection.

If memory serves, a "whistle-blower" attorney in IL got paid a series of finder fees from ordering things from the on-line branches of B&M stores (e.g. Barnes and Noble) and reporting them if they didn't collect use tax. I would suspect that some of those chains put the online stores in separate LLC's, and lost. Seems crazy to take the risk.

Posted by: Dave | Jun 26, 2008 6:48:19 AM