Red Marks No-Go States for Amazon Under Sales Tax Strategy

Amazon.com’s frenetic pace of online sales might look like a need for a traffic light in one of its increasingly famous fulfillment centers, and it appears the company has actually adopted one — of sorts — for its workers nationwide.

Red, it seems, means don’t go there. Yellow, presumably, means caution. And, based on a report in the Wall Street Journal, apparently green means money, so go for it.

Amazon, which has become either a life saver or a store wrecker in Tennessee, depending on your point of view, uses shades of red, yellow and green literally to direct its employees on where they should and shouldn’t go when traveling in the United States, according to the WSJ on Wednesday. The full account of the map process requires a subscription to the Journal.

According to the story by reporter Stu Woo, Amazon has a system where staffers must refer to a company map before entering specific states, because if they enter the wrong states it might trigger tax laws where Amazon would have to collect sales taxes on its business there.

Amazon does not like to collect sales taxes on its online business, as several states have learned with great difficulty. Tennessee is smack in the middle of that debate, with a complex dilemma on its hands. The state needs jobs in the worst way, so much so that some state officials, past and present, are willing to let Amazon establish warehouses in the state and avoid collecting taxes on its sales.

That happens while traditional brick-and-mortar retailers, often selling the same merchandise, have to collect the state’s sales tax, which can reach 9.75 percent when the local option is added to the state’s 7-percent sales tax rate.

According to the Journal, some workers have said they had to receive permission from Amazon managers or lawyers for the company before entering a “red” state on the Amazon map, drawn from tax ramifications. Otherwise, Amazon would have to collect taxes on its business there. Much of the focus of the Amazon debate in Tennessee involves nexus, or substantial physical presence, which would classify Amazon as a retail entity subject to the sales tax laws.

Sales over the Internet, Amazon’s comfort zone, have changed the game and frustrated revenue-hungry state governments. Amazon has figured out ways to operate without collecting taxes in exchange for providing much-needed jobs.

In Tennessee, Amazon struck a deal with the administration of former Gov. Phil Bredesen where the company did not have to collect the taxes because it is establishing large warehouses in Hamilton and Bradley counties. Bredesen’s explanation for the deal was that if Tennessee did not give Amazon the break, the company would just go a few miles down the road and build its fulfillment center in Georgia, where Tennessee wouldn’t get the taxes or the jobs.

Amazon last week announced a third distribution center in Tennessee, this time in Lebanon in Wilson County.

Rep. Gerald McCormick, R-Chattanooga, the state House majority leader who has supported the incentive for Amazon in the Chattanooga area, has said the state — now under Gov. Bill Haslam — is currently negotiating with Amazon in a way the company could be collecting taxes in the future, according to a story by Jeff Woods in The City Paper in Nashville.

The online retail giant is rapidly bringing hundreds of jobs to the state. Major retailers in Tennessee may bring a lawsuit fighting Amazon’s exemption on tax collections, according to a report by Andy Sher in the Chattanooga Times Free Press.

Sen. Randy McNally, R-Oak Ridge, and Rep. Charles Sargent, R-Franklin, each chairman of his chamber’s finance committee, proposed legislation this year that would force Amazon’s hand on collecting the tax.

But they postponed action on the bill in the face of resistance from other members and in the interest of waiting for an attorney general’s opinion on whether their bill passed constitutional muster, which it did. McNally mentioned a possible two-year grace period as a compromise, but Haslam said such an approach would only add to uncertainty with Amazon.

McNally and Sargent represent the argument that deals like those for Amazon are unfair to other retailers in the state that collect the tax and that ultimately the deals erode the important sales tax base in Tennessee.

Haslam has said the state needs to get its relationship with Amazon clearly defined, and he has said he would be willing to lead a national effort through the National Governors Association and persuade Congress to settle the issue for all states.

The Wall Street Journal report noted that Amazon’s approach typically allows it to undercut state retailers, saying those sales taxes “can exceed 8 percent,” which shows why Tennessee’s top potential rate of 9.75 percent stands out.

The Journal reported that Credit Suisse has estimated if Amazon were forced to collect sales taxes in all states, its loss would be as much as $653 million in sales this year which, the report said, would be on revenues of an estimated $45.5 billion.