With budget deficits staring down most state governments, there is an ongoing drive to collect sales taxes that have been successfully avoided for nearly two decades.
Online retailers such as Amazon.com (AMZN) are not bound by statute to collect sales taxes on behalf of state governments, except in certain cases. So consumers gain every time they shop online.
If Amazon were to collect sales taxes, the prices of items sold on its website could increase. This could initially impact results, as consumers reduce purchases and then get used to the higher prices. We doubt that there will be a significant long-term impact.
However, the money saved by not paying taxes is an advantage consumers enjoyed and has been catalytic to the shift from offline to online purchasing. This is an advantage Amazon stands to lose.
Amazon’s defense has so far been that it did not have “nexus” in a particular state, which basically means a physical presence in a state. Only companies with a physical presence in a state are required to collect sales tax on behalf of the state.
Therefore, while Amazon collects and pays sales taxes in Washington (where its registered office is located), North Dakota and Kansas (where its call centers are located) and Kentucky (where it processes returns), it does not do so in others. Amazon’s distribution centers and warehouses are technically not owned by the company, but by its subsidiary Kentucky-basedAmazon.com KYDC LLC, so Amazon does not collect or pay sales tax in the states where they are located.
Amazon’s theory is backed by a precedent. In 1992, the Supreme Court held in Quill Corp vs North Dakota that a company should be physically present in a state if the responsibility for collection and payment of taxes were to be thrust upon it and that the mere presence of customers did not constitute physical presence in a state.
But all that could change in the future. States are determined to make good revenue losses (due to sales tax avoidance by consumers), as evidenced by the continuous flow of suits and countersuits between states and online retailers.
Most recently, the state of California demanded that Amazon.com collect sales taxes on its behalf. Amazon has refused, saying that it would rather take its operations from the state, effectively cutting ties with more than 10,000 affiliates. The fear of job losses, especially in the recession-impacted economy has prevented this from happening so far.
Earlier, the state of Texas (where Amazon’s Irving distribution center is located) claimed that Amazon owes it $269 million in sales taxes for the period December 2005 to December 2009. Amazon has protested, using the above argument and also questioned the basis of assessment.
It also sued the Texas state under its Public Information Act, alleging that repeated requests to the comptroller’s office did not produce the audit results on which the assessment was made. Comptroller Susan Combs has stated that audit details had been provided, but some information that was requested later under the said Act had not.
What followed was fresh legislature (affiliate bill HB 1317), which is similar to the bill passed in New York that Amazon is protesting. The bill (goes into effect on September 1, if passed) brings under its purview any sales agreement with a Texas residentthat results in commissions or other considerations related to that resident’s referrals, including a link on an Internet site.
But we still don’t see how the state could recover back taxes on the strength of legislation that did not exist at the time. If anything, fresh legislation proves that Amazon could not be held liable for non-collection of sales taxes that were not required by law.
In any event, we think that sales tax legislation will gradually change across the U.S. to make collection of taxes easier. Particularly so, since online shopping will increase in days to come, with the amount of tax revenue that could be lost assuming even greater significance.
Amazon shares have dipped 8.0% since the beginning of the year, compared to a 12.6% increase for competitor eBay Inc (EBAY). Other online players such as Netflix Inc (NFLX) and Priceline.com (PCLN) saw their share prices increasing 14.7% and 7.0%, respectively.
We currently have a short-term Hold rating on Amazon and eBay, represented by the Zacks #3 Rank. However, both Netflix and Priceline are ranked #1, which translates to a short-term Strong Buy recommendation.
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