Lone Star State Takes a Bite Out of Amazon.com

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Yesterday’s topic was how the State of North Carolina went up against Amazon.com regarding Internet-based sales tax … and more or less won. Today, we’re talking Texas, and how the Lone Star state is approaching the issue. And, as the unofficial Texas motto is “Go Big or Go Home” they did just that – issuing Amazon a tax bill of some $269 million, for uncollected sales taxes from 2005 to 2009.

So how is Texas making this claim? Unlike other states, Texas doesn’t have any real Internet-taxation laws on their books. But like most other states, lawmakers are looking for ways to bring in revenue, and taxing online sales has been a target for several years.

Texas recently audited Amazon.com, as part of its regular procedures to determine whether or not a company has nexus within a state, and so falls under state taxation rules. Nexus means connection. So to have a tax nexus, a company must be somehow physically connected to the state. (At least that’s what the Supreme Court said in (Quill Corp. v. North Dakota (91-0194), 504 U.S. 298 (1992)). But Internet retailing was in its infancy in 1992, and since then has exploded into a multi-billion dollar business. Nexus audits are extremely popular with states right now, as they look for ways to draw in companies, and potential revenue sources.

But nexus laws aren’t the same from state to state. That’s part of the problem retailers face. What applies in one state doesn’t work in others. For example, in Texas, you can establish nexus for taxes almost before you know it. Spend a day at a trade show in Texas, for example, exhibiting products, and you’ll have nexus. You don’t have to sell anything – you can simply be giving away information – and you’re in the tax net. Texas also looks at other things, such as do you have property in the state, or do you have a fulfillment warehouse in the state?

That physical presence requirement is where Texas and Amazon are butting heads. According to Texas, Amazon set up a fulfillment center in the state back in 2006, yet has never collected sales tax, even though, under Texas law, that’s enough to establish nexus for taxes. Amazon, on the other hand, says that the fulfillment center is operated through a completely separate company, Amazon.com KYDC, LLC, which is based in Kentucky.

The problem here, though, is that Amazon owns the other company. It may have an independent operation, but it is a subsidiary of a larger organization, and that creates a connection, at least in the eyes of Texas taxing authorities. Compounding the problem is the fact that Amazon is also the 100% owner of another Texas-based company, Woot.com, another online seller.

Amazon has disputed the bill, and the Texas claim that it has nexus in the state. Who will win? It’s hard to say. If Texas can establish that something called the Unitary Doctrine applies, they will have a strong argument. The Unitary Doctrine is a legal concept that says companies can be connected if they are interdependent upon each other. From Texas’s viewpoint, that’s great. Unless the fulfillment center is also filling orders for Amazon’s competitors, for example, it’s hard to say it is a truly independent operation that would exist without Amazon.com’s business. On the other hand, many legal experts feel that it’s generally accepted law in the U.S. that retailing and distribution business are separate, and owning a business doesn’t create nexus for the parent.

This will be another one to watch closely. Amazon also has fulfillment centers in Arizona, Indiana, Nevada, Pennsylvania and Virginia, but doesn’t collect sales tax in any of those states, either. Will that change if Texas wins?

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