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Originally published May 21, 2011 at 10:02 PM | Page modified May 23, 2011 at 11:09 AM

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Battle over Internet sales taxes rekindles in Congress

Amazon has long professed to favor a federal solution to simplify a multitude of state and local sales tax collection rules, even though it would end the Seattle company's long run as an online tax-free haven. Yet Amazon has remained decidedly noncommittal on Congressional bills intended to do just that.

Seattle Times Washington bureau

quotes This is a poorly researched headline type article. I live in Washington, and shop at... Read more
quotes Out of state sales should not be taxed, period. I'm not taxed in OR when I buy a new... Read more
quotes "Michael Mazerov, a senior fellow with the Center for Budget and Policy Priorities... Read more

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WASHINGTON — As disgruntled competitors and cash-starved states seek to force Amazon to charge sales taxes on all its orders, the world's largest online merchant has insisted on one refrain: It'd be happy to collect, as soon as everyone agrees on a fair and simple way to levy the taxes.

That day may be drawing closer. A key Senate Democrat is poised to resurrect legislation to lift a decades-old legal prohibition on states requiring out-of-state retailers to collect the same taxes as local businesses.

The move by Congress would seem to be just the kind of federal solution to simplify a welter of tax rules that Amazon has long professed to support. Yet the Seattle company has remained publicly noncommittal on the bill, a stance rivals contend exposes Amazon's call for uniform taxes as insincere.

Indeed, Amazon is defending its lucrative tax loopholes around the country with the ferocity of a bargain hunter on Black Friday.

In New York, Amazon has sued to overturn a 2008 state law imposing sales taxes on shipments from out-of-state vendors. In Texas, Tennessee and South Carolina, Amazon plans to close or has threatened to cancel construction of distribution centers unless the states grant the company explicit tax exemptions.

And since 2009, Amazon has cut ties with thousands of affiliates — coupon sites and deal blogs that funnel visitors to amazon.com — rather than give in to attempts by Illinois, Colorado and three other states to count the affiliates as virtual storefronts that would legally obligate online retailers to tack on the tax.

Amazon's battles in nearly two dozen states reflect a mounting threat that could erase the sales-tax advantage that was part of the original business calculus by founder Jeff Bezos in 1994. Now state governments, many in fiscal straits, are aggressively pursuing the estimated $8.6 billion in taxes on Internet and catalog sales that went uncollected last year.

"The state legislatures are telegraphing to Congress that it's time to act," said professor Edward Zelinsky, an authority on tax law at Yeshiva University in New York who is following the Amazon case closely.

Court rulings

Under a pair of Supreme Court decisions from 1967 and 1992, states cannot impose sales taxes on merchants unless they have a physical presence such as a store or warehouse there.

Thus Amazon collects taxes in just five states, including Washington. It's a tax-free haven in 40 states. Among them are Arizona, Nevada, Virginia and four other states that are home to shipping centers or customer-service centers that have been set up as subsidiaries of Amazon to avoid triggering tax obligations. Five states have no sales tax.

Customers in the 40 states are supposed to pay the taxes on their tax returns. But only a tiny fraction of people are conscientious enough to do that or even aware of the rule. And it likely would be a while, if ever, before all states with sales taxes sign on to make online shopping carts tally the tax universally.

As early as this week, Senate Majority Whip Dick Durbin, of Illinois, the chamber's No. 2 Democrat, plans to propose a bill that would free states to require sales-tax collection by retailers with no local presence.

Similar legislation, dubbed the Main Street Fairness Act, died in a House committee in the last Congress. Rep. Adam Smith, D-Tacoma, was one of the bill's seven House sponsors. Several earlier versions of the bill also went nowhere.

Rep. Jim McDermott, the Seattle Democrat whose district includes Amazon, has publicly favored requiring remote merchants to collect taxes locally.

Twenty seven companies and trade groups spent several million dollars lobbying for and against the 2010 bill. Chief among them was the online vendor eBay, whose lobbyists made seven visits to Capitol Hill to discuss sales-tax issues and other legislation, according to the Center for Responsive Politics, a Washington, D.C., group that tracks money in politics.

Amazon lobbyists met four times with members of Congress or their staffers last year regarding the Main Street Fairness Act. The company reported spending $610,000 on lobbying, although the expenses also covered other bills discussed at the same time.

The most active support for the tax bill came from traditional retail behemoths. Best Buy, Wal-Mart Stores, Sears and Target accounted for a total of 19 lobbying calls last year.

Amazon recently has ramped up political contributions to federal lawmakers. Amazon's political-action committee (PAC) spent $214,000 during the 2010 election cycle, double what it spent two years earlier. Still, Amazon's political presence is muted; Boeing, the nation's 17th most active PAC, doled out 10 times as much.

Durbin's bill would allow states that adopt a national streamlined sales-tax agreement to require all out-of-state retailers, not just Internet sellers, to charge the tax. That would end, for instance, tax-free orders to Nordstrom customers in Oklahoma or Iowa.

Amazon won't say whether the proposed legislation would help reach its objective for simple and "evenhandedly applied" tax rules. The company carefully guards its public comments on the topic, and would not discuss its position on the record.

Amazon has given conflicting assessments about what uniform sales-tax collections would do to its bottom line. But a 2009 paper in the Journal of Marketing Research suggests that sales taxes could have a marked effect on online shoppers' behavior.

Researchers from business schools at Northwestern University and the Massachusetts Institute of Technology examined sales records of a clothing retailer after it opened its first store in an unnamed state.

Comparing the online purchases by state residents who lived beyond driving distance of the store but now had to pay sales tax to that of their neighbors in an adjacent, tax-free state, researchers calculated that introducing the tax reduced orders the next year by nearly 12 percent.

The conclusion: the Web makes comparison shopping easy, and customers confronted with the unaccustomed sales tax fled for better deals elsewhere.

Danny Diaz, a spokesman for Alliance for Main Street Fairness, a Virginia-based group funded by Amazon's brick-and-mortar rivals, contends that Amazon's official comments notwithstanding, the company's true motive is to preserve the status quo.

"They're not interested in solutions. It's all talking points," said Diaz, a former spokesman for the Republican National Committee. "At the end of the day, Amazon wants to avoid collecting taxes for as long as possible."

No tax benefits

Others argue e-tailers and remote merchants shouldn't have to hassle with taxes in states where they lack presence and thus get no benefits.

"The question is, 'Who should collect' " the taxes? said Jerry Cerasale, senior vice president for government affairs with the Direct Marketing Association. "Companies have to expend resources to become tax collectors for the state."

Cerasale's group, which represents online merchants, catalog publishers and other direct sellers, opposes the Main Street Fairness Act. Amazon is a member of the trade association, and Cerasale said the company is active in shaping the organization's policy.

Companies could voluntarily charge and remit taxes even in states where they do not have a business. Orvis, a Vermont-based fishing and apparel chain, does it.

Michael Mazerov, a senior fellow with the Center for Budget and Policy Priorities in Washington, D.C., said uncollected sales taxes are depriving states and local communities of much-needed revenue.

Mazerov noted that Amazon started out as a bookseller. It now has a huge best-seller with its electronic reader, Kindle. Amazon's actions today, Mazerov suggested, may well shortchange its future.

"What kind of market would Amazon have for Kindle in the future if we keep squeezing resources for schools?" he asked.

Kyung Song: 202-662-7455 or ksong@seattletimes.com.

Seattle Times news researcher David Turim contributed

to this report.

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