May 10, 2011, 2:15 PM

Amazon’s fulfillment push

Amazon is expanding its distribution network even as it faces related sales tax dangers.

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Amazon.com continues to expand it distribution network across the United States even as it keeps watch on state efforts to tie tax collection efforts to the retailer’s warehouses.

Amazon, No. 1 in the Internet Retailer Top 500 Guide, says it is going forward with plans to spend $180 million to build three distribution centers in Tennessee that will employ 1,700 full-time and 2,000 part-time and seasonal workers. The new centers will join two other distribution facilities Amazon is building in the state for about $139 million.

Tennessee lawmakers recently have introduced legislation that would require Amazon to collect sales taxes on purchases made by consumers in the state. The bill, sponsored by Senate Finance Committee chairman Randy McNally and House Finance Committee chairman Charles Sargent, both Republicans, specifies that retailers with distribution facilities in the state must collect sales taxes. Under federal law, states can require online retailers to collect sales tax only if the e-retailers have an in-state physical presence, or nexus, such as stores or distribution centers.

Amazon, however, signed an incentive agreement with Tennessee’s former governor, Democrat Phil Bredesen, that includes an exemption from sales tax collection. Amazon says it expects the agreement to remain in force; Bredesen’s successor, Republican Bill Haslam, says he backs the agreement. “We’re looking at expanding our commitment to Tennessee because the state is committed to Amazon,” says Dave Clark, Amazon’s vice president of North America operations.

Last month, Amazon abandoned plans to build a fulfillment center in South Carolina after lawmakers voted against an incentive package that included property tax breaks and a pass for the retailer from having to collect sales taxes on purchases by South Carolina consumers. Amazon also has dropped plans for Texas distribution centers as that state moves toward its own law tying sales tax collection to in-state facilities. 

Also this week, Amazon said it would expand its fulfillment operations in Arizona and Indiana, states where it can operate such facilities without having to collect sales tax. In Arizona, Amazon plans to add 400,000 square feet to its fulfillment center in Phoenix, making the facility one of the retailer’s largest centers, with more than 1 million square feet. Amazon also operates two other fulfillment centers in the Phoenix metropolitan area, and after the planned expansion will have more than 3 million square feet of warehouse space there, representing a total investment of tens of millions of dollars, Clark says.

In Indiana, Amazon says it will open its third fulfillment center in the state this year. The 900,000-square-foot facility in Indianapolis will create several hundred full-time jobs and hundreds of seasonal jobs, the retailer says.

In both Arizona and Indiana, Amazon’s fulfillment centers are operated by Amazon subsidiaries that those state governments do not consider to constitute nexus for Amazon itself, and which therefore present no tax-collection responsibilities for the retailer.

Amazon also said this week it is planning to build a 110,000-square-meter (about 1.2 million square feet) distribution center in Germany, one of two major distribution centers the retailer intends to open in the country this year. For more information about how Amazon and other online retailers operate in Europe, click here.

George Isaacson, a partner at Brann & Isaacson, and Steve DelBianco, executive director at NetChoice, will speak at the Internet Retailer Conference & Exhibition 2011 about taxes in a session entitled "How to be prepared when the sales tax officers call."

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