Amazon is no stranger to tax disputes. Thus far, the typical tax claim concerning the online retail goliath involves its obligation to collect sales taxes. Several states have contended that the presence of Amazon Associates within its borders was sufficient to meet the substantial nexus mandated by the Commerce Clause in order for a state to require that a retailer collect sales taxes for purchases by residents within the state. Amazon usually “fixes” that problem by terminating its Associates in the complaining state.
In its 2010 Annual Report, Amazon offered the following disclosure regarding a twist to the typical sales tax dispute:
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 through the date of the assessment. 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.
Depending on the amount and the timing, an unfavorable resolution of this matter could materially affect our business, results of operations, financial position, or cash flows.
In Texas, Amazon had an actual physical presence within the state in the form of a warehouse facility in Irving, Texas. So, the modern day riddle of the Sphinx is how can Amazon have a warehouse in Texas, but have no physical presence in that state? According to Amazon, the answer is obvious. The warehouse is operated by a separate and independent entity.
Without waiting for the tax dispute to be resolved by the courts, Amazon preemptively announced that it will be closing its Irving fulfillment center and leaving Texas over its “unfavorable regulatory climate.” Mind you, Texas is a state with no individual income taxes or corporate income taxes, so take Amazon’s indignant protest with a grain of salt. Amazon also sent a WARN Act letter to the Texas Workforce Commission detailing the job losses that will occur at their Irving facility.
In contrast to Texas, Tennessee reportedly has agreed not to require Amazon to collect sales taxes for purchases by in-state residents even though Amazon will be operating two distribution centers within that state. In this high unemployment and high deficit environment, political futures may be determined according to whether a state is targeting job versus tax revenue growth.