Amazon has aggressively fought state efforts to impose sales tax on its operations. In 2008, New York passed a law that required online companies to collect taxes if they had deals with marketing affiliates based in the state. The law was designed specifically to target Amazon and other large online retailers—many called it the “Amazon tax.” In response, Amazon sued New York over the law’s constitutionality—marketing affiliates, Amazon argued, did not constitute a significant presence in the state. (Overstock.com, another company that has carefully avoided collecting taxes, took a harder line. In response to the New York law, Overstock canceled its relationships with all New York affiliates, freeing it from collecting any taxes in the state.)
While Amazon is still fighting the New York tax law, the company has been collecting taxes in the state as per the legislation. But Amazon has pushed back against collecting taxes in three other states that passed similar laws—it told its marketing affiliates inColorado, North Carolina, and Rhode Island to take a hike, allowing the company to skirt tax collection there. And it has threatened to do the same in other states—including California—where legislators have proposed affiliate-related taxes.
So, is Amazon’s tax-free status unfair? Of course it is. As [Michael Mazerov of the Center on Budget and Policy Priorities] points out, Amazon has physical operations in 17 states in which the company and its employees enjoy the fruits of local taxes—police and fire protection, roads, hospitals, and other infrastructure that make its operations possible. Yet Amazon skirts tax collection in most of these places through clever legal tricks. For instance, it has incorporated its warehouses and Web site as separate legal entities in order to argue that it doesn’t really have a presence in Nevada, Texas, and other states. The Kindle offers another example of that strategy—the e-book reader was developed at Lab126, an Amazon office based in Cupertino, Calif. But that office is actually a legal subsidiary, freeing Amazon of collecting any taxes in California.
Anything that drives a company to resort to such trickery cannot be good public policy. The solution will ultimately need to come from Congress, which means it won’t happen any time soon. Out of fairness to brick and mortar retailers, as well as to state and local governments, it needs to happen eventually.