Legality of Amazon’s Deal with Texas Is Questioned

On the heels of last week’s Amazon Tax Update, we read news yesterday that questions the legality of the deal made by Texas Comptroller Susan Combs to forgive Amazon.com’s $269 million Texas sales tax debt. According to the Austin American-Statesman, the deal, in which Amazon promised to bring 2,500 jobs and $200 million in capital investment to Texas, could be declared illegal, based on an undisclosed, “immaterial payment” made on the original $269 million debt, as well as the fact that the Texas state constitution prohibits forgiving tax debts.

An Amazon Sales Tax Update

Like many of you, we at MAXIMUS have been following Amazon.com’s ongoing, headline-grabbing battles with various states over the collection of sales tax for online purchases made by consumers. Over the past few months, we have discussed how the addition of a sales tax will (or will not) affect Amazon’s sales, how the nexus argument fits in with various states’ claims on Amazon sales tax, and whether Amazon was actually liable for the $269 million the Texas Comptroller claimed the company owed in delinquent sales tax.

April proved to be a busy month on the “Amazon Tax” front, so here is an update on all the new developments:

How Will The Introduction of Sales Tax Actually Affect Amazon’s Sales?

We have discussed the Amazon sales tax issue in this space on many occasions, but a Wall Street Journal article today brings up a point we had not discussed in any of our previous posts: what effect will the presence of sales tax have on Amazon’s sales?

This is an important question for the online retailer — Amazon was able to rise to prominence precisely because of the sales tax exemption for online purchases, and their prices have been consistently low enough to severely undercut even discount bricks-and-mortar retailers like Wal-Mart. Taking away this advantage could have a serious effect on Amazon’s sales, however. Even though Amazon’s sales-tax-included prices would be almost as low as Wal-Mart’s and still below Target’s, recent investigations into consumer buying behavior have indicated that sales taxes have a marked effect on online sales.

A study performed by Stanford University economists on eBay buyers concluded that online consumers are more likely to buy a product in a different state if the sales tax in their home state is higher. In fact, “for every 1% increase in the sales-tax rate, the researchers calculate the share of consumers’ online purchases from same-state sellers falls 4% to 6%.”

We will continue to watch this issue with interest.

Average Sales Tax Rate Paid by Americans in 2011 at Lowest Since 1967

USA Today reports that Americans paid a lower average sales tax rate (4.27%) in 2011 than at any time in recent history. Down from 4.63% five years ago and 5.18% in 1973, the average rate has been affected by the consumer shift toward purchase of nontaxable services and savvy shoppers’ tendency to use the internet to buy sales-tax-free goods.

The report cites high state tax rates (motivating consumers to buy elsewhere), deflation (which has lowered sales tax due to falling prices), and increased exemptions as other reasons why the average tax rate has fallen.

Just How Complex IS the Management of Your Company’s State Taxes?

A terrific article entitled “The Non-Tax-Executive’s Guide to State Taxes” appeared on CFO.com this week and could serve as something of a companion piece to our post from Tuesday on the C-level misconceptions concerning proper handling of state and local tax issues. We like it because it doesn’t soft-pedal the serious complexities of multi-state tax compliance or the potentially damaging consequences if this situation isn’t handled correctly.

The writers use the following points to demonstrate just how important it is to take seriously state tax issues:

Amazon: The Nexus Angle

More news this week on the Amazon case from the Wall Street Journal (subscription required), this time concerning the company’s efforts to avoid creating nexus (and thus avoid collecting and remitting sales tax) in various states While we have discussed one side of the Amazon case elsewhere, we haven’t necessarily touched on this issue, which has been claiming the lion’s share of national media attention in recent weeks and months.

Does Amazon Owe $269 Million to Texas?

In our opinion, the answer is “no,” but not for the reason you’ve probably heard in the dozens of news reports on the subject.

If our answer seems counter to most of the opinions you’ve heard, it is. Most commentary has focused exclusively on whether Amazon is doing business in Texas. In other words, has Amazon established nexus (business presence) in Texas sufficient to subject it to its jurisdiction and thus its tax laws?