Why Amazon May Soon Collect Sales Tax

Come to think of it, how has Amazon managed to not collect sales tax for so long?

You may or may not have realized it in the course of shopping online, but Amazon.com has avoided collecting sales taxes from most customers for 16 years. Those days may be over.

Janet Novack at Forbes notes that the company's strategy is increasingly imperiled as Amazon builds warehouse and fulfillment centers in more locations, cash-strapped states search for revenue, and retailers who do collect sales tax grow increasingly frustrated about the price advantage Amazon enjoys, especially as sales tax rates rise.

Amazon, according to Novack, is the only company among the web's top ten retailers that doesn't collect sales tax from most buyers. How has the web's largest retailer managed to do it?

Back in 1992, the Supreme Court ruled that only merchants with a physical presence in a state--a store, say, or an office--had to collect that state's sales tax, in an effort to avoid forcing retailers to comply with thousands of tax jurisdictions and interfering with interstate commerce. Novack says Amazon's CEO, Jeff Bezos, took advantage of the ruling by by locating his first East Coast distribution center in sales tax-free Delaware and by establishing Amazon's headquarters in Seattle rather than Silicon Valley to avoid charging California customers sales tax.

Over the years, some states have challenged the definition of a "physical presence." In 2008, for example, New York required Internet retailers like Amazon to collect state sales taxes if they partnered with "affiliate" sellers that had physical operations in New York. When other states adopted similar measures, Amazon responded by dropping its affiliates in those locations. The Seattle Times has a map showing the states where Amazon has distribution centers and the states where the company actually collects sales tax. (Many people are not aware that states actually require shoppers to pay the sales tax on their online purchases even if retailers don't collect the tax. But, as the National Retail Federation's Maureen Reihl tells CNN, it's "an honor system"--one that's rarely honored.)

There are reasons to believe, however, that more states will soon win their battle with Amazon. As Douglas McIntyre observes at 24/7 Wall St., Amazon's logistics operations simply need to be located somewhere, and the company, as it grows, "will eventually be tripped by its own infrastructure needs." Meanwhile, as states face budget shortfalls and e-commerce expands, California, Illinois, and Texas are debating legislation to compel companies like Amazon to collect state sales taxes and South Carolina is rethinking its promise to grant Amazon a sales tax break in exchange for establishing a distribution center in the state. Furthermore, as the recession continues to take a toll on small businesses, complaints from brick-and-mortar retailers that Amazon enjoys a competitive advantage may be landing on more sympathetic ears. As one retailer in Indianappolis told CNN, "They can come in my store and look at it ... they can touch it, they can feel it, but then they can go home and order it online ... and not pay sales tax."