Amazon sales tax: The company's position on state sales tax is unfair and unethical.

Innovation, the Internet, gadgets, and more.
July 12 2011 5:36 PM

Amazon Wants To Save You Money

Should shoppers care that its position on state sales tax is unfair and unethical?

Amazon founder Jeff Bezos.
Amazon founder Jeff Bezos

There are two powerful arguments in the tax debate between Amazon.com and the state of California. On the one hand, there's simple fairness. For years, online retailers—which weren't required to collect sales tax on purchases from Californians—have enjoyed a huge advantage over physical stores, which must collect sales tax.A $1,000 TV from your local Best Buy costs about $1,100 with tax; at Amazon, it costs exactly $1,000. Technically, residents who purchase stuff from out-of-state online stores must pay a "use tax" on the merchandise on their annual tax return, but almost nobody does that. Late last month, California Gov. Jerry Brown signed a bill that forces large online retailers to collect taxes from residents. The government estimates that the legislation will bring in more than $1 billion a year in revenue. Tax proponents also argue that the law will let the state's businesses compete against online stores, thereby creating local jobs.

And then there's the other side of the argument: ARE YOU KIDDING, YOU WANT TO RAISE MY PRICES, WTF???

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Millions of Californians, myself included, love shopping at Amazon because it's cheap and convenient. Now the state wants to make it slightly less cheap. Even though I agree with the fairness argument intellectually, I feel an instant aversion to my prices going up. The Amazon loophole—the ability to buy that TV for not a dollar more than its sales price—motivates many of my purchases, and I'd really hate for it to go away.

In other words, this isn't an argument between two equally reasonable positions. It's an argument between reason and emotion, between your brain and your gut. Amazon has no intellectually sound arguments against collecting taxes from residents—by all ethical and civic standards, its position is unsound. Instead, Amazon is counting on our emotions prevailing—on loyal, tax-savvy customers like me lashing out at our price-hiking legislators. I worry that there's a good chance Amazon—and people like me—will prevail.

The new California law alters Amazon's tax status by redefining what it means for a business to have a presence in the state. In a 1992 decision, Quill Corp. v. North Dakota, the Supreme Court ruled that an out-of-state company can only be forced to collect sales taxes from a particular state when the company has a "substantial nexus" in that state. Merely selling goods to residents through the mail does not meet the "substantial nexus" test, the court said. California's law expands the state's definition of " retailer engaged in business in this state" to include any company that has an office in the state, any company that sets up relationships with marketing affiliates in the state, and any company that designs products in the state. Each of these conditions applies to Amazon.

Several other states, including New York, have passed laws like California's, and Amazon has fought every single one. Even before the California bill was signed, the company terminated its relationships with thousands of "affiliates" in the state. These affiliates get a slice of a customer's purchases when they link to Amazon. (Disclosure: Slate is an Amazon affiliate; when you click on an Amazon link from Slate, the magazine gets a cut of the proceeds from whatever you buy.) Amazon seems to believe that cutting off affiliates will absolve it from the responsibility to collect taxes under the new California law, but Amazon's other activities in the state will make it hard for the company to claim it doesn't have a presence in the Golden State.

That's why Amazon is launching a second front in the battle against sales tax. On Monday, it announced that it would support a ballot initiative to overturn California's law. Amazon's vice president of public policy, Paul Misener ( aptronym alert!), put out a statement that borrows from the rhetoric of the Tea Party. The ballot initiative is "a referendum on jobs and investment in California," he said, and "with unemployment at well over 11 percent, Californians deserve a voice and a choice about jobs, investment, and the state's economic future." If Amazon spends substantial sums to push such a ballot measure next fall, it's hard to see how it could lose. The ads write themselves: Don't let greedy lawmakers tax your Internet purchases!

Though I doubt most voters would care to pick apart such a populist message, such a sound bite falls apart under scrutiny. For example, the idea that Amazon is an "out-of-state" retailer in California is a complete fiction. Amazon owns several subsidiaries whose primary offices are located in the state. Within a 30-minute drive from my home, I can visit some of Amazon's most important divisions— A9, which builds its product search engine, is located in Palo Alto, while Lab 126, the Amazon office that designs the Kindle, is in Cupertino. Amazon has also repeatedly claimed that the California law is unconstitutional, but it has not (yet) filed suit against the measure. I suspect it's afraid it might lose on the merits—that any judge who hears that Amazon builds its most successful product in the state will declare the company to be as Californian as Apple Inc.

Amazon has long argued that it is not really opposed to collecting state sales taxes—what it really hates is the headache of adhering to different rules in different states. "Our point of view on this is that we should simplify the sales tax system, and we've been consistent on this for about 10 years," CEO Jeff Bezos told Consumer Reports in May. Specifically, Amazon favors something called the Streamlined Sales Tax Agreement. The agreement creates a single list of what kinds of goods and services are taxable, and makes rates across states more uniform. Collecting state sales taxes in the absence of such an agreement, Amazon says, is terribly complicated—the company will have to constantly keep track of what's taxable where, and at what rate.

I'll agree with Amazon—the SSTA is a pretty good tax-reform idea. The trouble is, at the moment it's mostly just an idea—and a pie-in-the-sky one, too. So far, 44 states have signed the pledge, but only 24 have passed legislation to enact it. In order for the states to be able to force online retailers to collect taxes under the agreement, the federal government will also need to pass legislation recognizing the agreement. Over the last few sessions of Congress, lawmakers in both parties have introduced bills to do so. But none of those efforts has gone anywhere, and the latest bill—championed by Illinois Democratic Sen. Dick Durbin—is unlikely to do any better. Other than as a convenient way for Bezos to deflect questions about Amazon's position on taxes, the company hasn't lent much support to a streamlined tax initiative, either—certainly not anything like the resources it's now spending to fight states' tax plans.

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