February 11, 2011, 1:13 PM

Amazon’s Texas showdown

Amazon is closing its Texas fulfillment center in a sales tax dispute with the state.

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Amazon.com Inc. says it will close its Dallas area fulfillment center and reverse its plans to build additional centers in Texas, where the world’s leading web-only retailer was unable to reach an agreement with state officials to avoid collecting sales tax on purchases made by Texas residents.

“Closing this fulfillment center is clearly not our preferred outcome,” Dave Clark, Amazon’s vice president of North American operations, said in a memo distributed this week to employees. “We were previously planning to build additional facilities and expand in Texas, bringing more than 1,000 new jobs and tens of millions of investment dollars to the state, and we regret the need to reverse course.”

Clark said Amazon, No. 1 in the Internet Retailer Top 500 Guide, decided to terminate its fulfillment center operations in Texas because of “the unfavorable regulatory climate” created by the office of the Texas Comptroller of Public Accounts.

“Despite much hard work and the support of other Texas officials, we’ve been unable to come to a resolution with the Texas Comptroller’s office,” Clark said. He didn’t specify which Texas officials had supported Amazon or the nature of their support.

The Texas comptroller’s office, however, said its policy toward Amazon was in line with the state’s efforts to get all retailers to abide by the state’s sales tax law. “We regret losing any business in Texas, but our position hasn’t changed: If you have a [physical] presence in the state of Texas, you are required to pay sales tax just like any other business that has a physical presence in Texas,” the comptroller’s office said.

The comptroller’s office estimates that Texas loses $600 million per year in uncollected sales tax revenue related to Internet sales. Last October, the state issued Amazon a bill for $269 million for uncollected sales tax between December 2005 and December 2009. The $269 million includes $220 million in uncollected tax plus nearly $50 million in penalties and interest, according to the state comptroller’s office.

Like other states, Texas wants to recoup sales tax revenue lost to Internet sales as a way to shore up budget shortfalls while also creating what’s often referred to as a level playing field among retailers that collect sales tax and those that don’t. According to a 1992 U.S. Supreme Court ruling, retailers can be required to collect sales tax only in states where they have what is commonly called nexus—that is, the operation of physical facilities in a state. In some cases such as in Tennessee, however, distribution centers operated as subsidiaries of a retailer have not necessarily been tied to nexus requirements.

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