September 1, 2011, 4:44 PM

Amazon bargains on taxes

Amazon wants to avoid a California tax by building warehouses.

Lead Photo

As some California lawmakers seek to block a referendum on the state’s new Internet sales tax law, Amazon.com Inc. is offering to spend $500 million over the next few years to build and staff several distribution centers in the state. In return, Amazon expects California to exempt it from having to collect sales tax until some time in 2014, state officials say.

George Runner, a Republican who is a member of the California Board of Equalization, which oversees tax collection for the state, says Amazon’s offer addresses the most important economic issue facing the state. “The key issue is job creation,” he says.

But other state officials who oppose tax breaks for online retailers have given the offer a cool reception, noting that the state stands to lose about $200 million a year in uncollected sales tax.

Bill Dombrowski, president and CEO of the California Retailers Association, which represents about 100 large multichannel retailers, says all bricks-and-mortar retailers in the state have been losing business to out-of-state web-only retailers because of the sales tax advantage online retailers have enjoyed. “We’re losing 18,000 jobs a year, which could rise to 34,000 by 2013,” he says. “That’s a lot of empty stores.”

Amazon’s offer coincides with an ongoing attempt in the California Legislature to vote again on a modified version of the legislation that passed in June requiring out-of-state Internet retailers to collect sales tax from California customers if the retailers have an in-state physical presence. California state legislators who support the new sales tax law hope the second vote on the Internet sales tax law, now labeled AB 155, will result in a two-thirds margin in favor of the tax. Passage of the so-called urgency bill by a two-thirds majority would prevent the state from including on the ballot next year a popular referendum to let voters decide whether the law should be repealed, says Runner, who is a former state senator.

The tax law passed in June says online retailers have a physical presence, or nexus in legal terms, if they get customers through California-based affiliate web sites or have in-state subsidiaries for such purposes as operating distribution centers. Under federal law, states can mandate that retailers collect sales tax only if the merchants have in-state physical presence. Amazon has terminated its business relationships with affiliate web sites, including blogs and content sites, in California and other states with similar laws; it has also killed plans for distribution centers to avoid abiding by a nexus law in Texas.

Runner contends that legislators who don’t support Amazon are missing the point of what the state needs economically. “Instead of continuing their attack on out-of-state online retailers,” he says, “the governor and Legislature ought to be asking [retailers] how we can work with them to get Californians back to work.” Calls to the office of Gov. Jerry Brown, a Democrat, and to legislators known to support the new tax were not immediately returned.

The Amazon offer, however, leaves some outlying questions that will have to be addressed by state officials, Runner says. For example, he adds, officials need to clarify if any deal for a sales tax exemption with Amazon would extend to other out-of-state online retailers, such as Overstock.com Inc., which has also aggressively cut off relationships with affiliates in states that have passed similar laws.

Amazon also did not immediately return a request for more details about its offer. But Runner says the retailer has offered to spend $250 million to build distribution centers by the end of 2012 and $500 million by early 2015, while creating 3,600 jobs by 2013, with the running total of new jobs created reaching 4,500 in 2014 and 7,000 by 2015.

Amazon is No. 1 in the Internet Retailer Top 500 Guide; Overstock is No. 27.

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