No Sales Tax for Amazon in SC

South Carolina lawmakers have blinked in a stare-down with Internet sales giant Amazon.com over sales taxes, a development that could reverberate in Tennessee.

The House and Senate in South Carolina have voted to give Amazon a five-year exemption from collecting sales taxes, a move that comes after the company stopped a project in South Carolina because of the tax dispute.

Amazon has said South Carolina mistakenly thought the company was bluffing about stopping its activity in the state.

Amazon has reportedly made a similar threat to shut down new sites in Tennessee, where it is building distribution centers in Chattanooga and in Charleston in nearby Bradley County. The chairmen of the House and Senate finance committees in the Tennessee General Assembly — Sen. Randy McNally, R-Oak Ridge, and Rep. Charles Sargent, R-Franklin — proposed legislation this year aimed at requiring sales tax collections on the Internet sales, but both deferred the legislation until 2012.

Amazon, based in Seattle, has begun its Tennessee hiring process for its distribution centers, including a series of hiring events across the state this week.

Advocates for allowing Amazon to forgo sales tax collections are looking at the company’s presence for its value in creating jobs, which have been scarce in the troubled economy. Reports have put an estimate of 1,400 jobs on the two facilities in East Tennessee, after an investment by Amazon of $139 million.

The Tennessee State Funding Board on April 12 approved $4 million for infrastructure and $599,500 for job training for the Amazon site in Chattanooga. The same day the board approved $2.2 million in infrastructure and $102,500 in job training for Amazon in Charleston.

The original Amazon deals in Tennessee were struck during the administration of then-Gov. Phil Bredesen, although lawmakers have had difficulty finding out details of those agreements. Gov. Bill Haslam has said the state should honor its commitment to Amazon.

At issue is whether Amazon should have to collect the state sales tax of 7 percent along with the additional 2.5 percent local option sales tax, which combined make Tennessee’s sales tax among the highest in the nation.

Amazon says it is protected under the U.S. Constitution’s commerce clause from having to collect the Tennessee sales tax because its distribution centers do not constitute substantial presence, or “nexus” in the state. The company’s position is that it does not have a retail presence in Tennessee, that its “fulfillment centers” simply distribute the goods and do not conduct sales.

Some Tennessee lawmakers believe the centers do create sufficient nexus to require collection of the taxes, as do a vast number of brick-and-mortar retailers in the state. Lawmakers have requested an opinion on the issue from Tennessee Attorney General Robert Cooper.

A compromise was struck in the South Carolina legislature that provides a five-year exemption but says Amazon must include language in confirmation emails to customers on sales that the customer may owe a state tax on the transaction. At the same time, an Internet link must be provided the customer by Amazon to the South Carolina Department of Revenue. In addition, Amazon would have to inform customers of the yearly total of tax they owe on their Amazon purchases.

Amazon officials have reportedly said they will renew their construction on their South Carolina site when the legislative action becomes law.

In its most recent annual report to stockholders (pdf), Amazon said its fulfillment centers and customer service centers could result in greater tax obligations. The report notes that Supreme Court rulings have protected Amazon from sales tax collections.

“However, a number of states, as well as the U.S. Congress, have been considering or adopted initiatives that could limit or supersede the Supreme Court’s position regarding sales and use taxes on Internet sales,” the company report said.

“If these initiatives are successful, we could be required to collect sales and use taxes in additional states or change our business practices.”

Amazon has voiced its support for federal efforts to create a streamlined sales tax system that would address Internet sales tax issues, an approach Haslam has said is a better answer than having a single state tackle the matter. But questions have been raised about the willingness in Congress to enact such a measure, because it would clearly be viewed politically as a large tax increase on consumers.

Amazon has had a similar spat with Texas, where the company has yanked an expansion operation in a disagreement over collecting taxes. Texas has said it is owed $269 million. According to Site Selection magazine, which covers economic development issues, Amazon collects taxes in several states, including Kansas, Kentucky, New York, North Dakota and Washington. It does not collect sales taxes in Arizona, Indiana, Nevada, Pennsylvania and Virginia. The company has cut off arrangements in Rhode Island, North Carolina, Hawaii and Colorado, the magazine reported.

Amazon has more than 50 fulfillment centers.

Amazon has said it hopes to bring several fulfillment centers to Tennessee, which it says could mean an additional 1,500 jobs in Nashville and Knoxville. Should the state agree to allow Amazon to avoid collection of sales taxes at its two East Tennessee sites, the precedent could factor in on future arrangements under the Haslam administration.