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Amazon’s sales tax fight is heating up as states crack down

(The Daily Record / Maximilian Franz)

(The Daily Record / Maximilian Franz)

Amazon shoppers will probably pay sales tax on more of their purchases this holiday season.

Right now, consumers pay tax on goods purchased directly from Amazon, but they don’t in many cases if they buy from third-party merchants on the e-commerce giant’s marketplace. That could change on Dec. 1, when some merchants are expected to start collecting taxes in exchange for partial amnesty from back taxes in about half of U.S. states—among them Florida, New Jersey and Texas.

The deadline to apply for the multi-state offer is Oct. 17, and it’s not clear how many merchants will sign on. Because so many have complained about the tight timeline, the states are holding a meeting on Wednesday to decide whether to extend the deadline.

But however the drama plays out, all signs point to the eventual closing of long-standing loopholes that let you buy stuff online without paying sales tax.

“We’ve been waiting many years for the federal government or the courts to tackle this issue and they haven’t,” says Minnesota Senator Roger Chamberlain. “It’s a fairness issue. Right now, there’s an unlevel playing field that disadvantages brick-and-mortar stores.” Even President Donald Trump has weighed in on the issue, tweeting in August that Amazon was causing “great damage to tax paying retailers.” Inc., which prefers one federal law governing sales tax collection rather than a state-by-state patchwork, declined to comment.

A 25-year-old U.S. Supreme Court case established the rules many online merchants follow today. The ruling barred North Dakota from forcing Quill Corp. to levy sales tax because the mail-order office-supply operator lacked a physical presence in the state.

For many years, Amazon hewed to the Quill ruling and didn’t collect sales tax—even on the stuff it sold itself. But the company gradually changed its position as it built warehouses all over the country, giving it a greater physical presence in multiple states. Amazon now collects sales tax on inventory it owns directly in all states that levy such taxes.

But about half of its sales are goods owned by 2 million merchants posting products on its site. Amazon leaves tax collection up to them and many maintain that’s not their responsibility. That’s why shoppers pay tax on some Amazon purchases and not on others.

States have been waiting for the Supreme Court to revisit the ruling or the federal government to clarify the matter with new laws. But the old ruling stands, no bills in Congress have made any headway, and the tax revenue lost to online sales continues to grow. So now the issue is playing out one state at a time.The key question: Who will be responsible for collecting and remitting the taxes when someone buys something from a third-party seller on Is that Amazon’s job or the merchant’s job or some combination?Experts disagree, and states are using different tactics to collect. South Carolina is going after Amazon directly in court, saying it owes $12.5 million in back taxes, penalties and interest from third-party sales. Amazon has vowed to fight the case.

Minnesota, home to brick-and-mortar competitors Target Corp. and Best Buy Co., in June enacted the country’s first law requiring companies like Amazon and EBay Inc. to collect sales taxes on goods sold by third-party sellers. They’ll have to comply in 2019—or even sooner in the event the Quill ruling is overturned. Amazon’s home state of Washington followed with a similar law that takes effect in January.Massachusetts, meanwhile, got a court order forcing Amazon to turn over by mid-October the identities of marketplace sellers doing business on the site since 2012. That could set off a scramble among states competing to collect back taxes, says James Thomson, a former Amazon senior manager who now advises merchants how to sell on the marketplace. “If Massachusetts succeeds,” he says, “it’s going to be a bloodbath.” Amazon has yet to indicate if it will provide the records or challenge the ruling.

Several merchants interviewed for this story say Amazon should be required to handle taxes for sales on its marketplace. Their argument is that Amazon is like a traditional retailer while they’re like suppliers. They also say collecting sales tax is an unfair burden on small business because it would require them to file every month in multiple states and taxing districts that each have their own rates and peculiarities. But the merchants fear states would rather collect taxes from them because they’re easier targets than Amazon, which can afford a protracted legal fight.

To further complicate matters, Amazon has launched a nationwide search for a second headquarters location that could employ up to 50,000 people. So states taking an adversarial position against Amazon by trying to collect taxes are simultaneously trying to lure the company for a major investment. Sellers fret that Amazon will have leverage to push the tax collection burden onto them.”Sellers are scared,” says Paul Rafelson, a corporate tax attorney advising online merchants regarding the amnesty agreement. “They don’t think they did anything wrong, but they don’t know if they can afford to get caught. They want to know why the states aren’t going after Amazon like South Carolina.”