September 1, 2011, 4:44 PM

Amazon bargains on taxes

Amazon wants to avoid a California tax by building warehouses.

Paul Demery

Managing Editor, B2B E-commerce

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the state from including on the ballot next year a popular referendum to let voters decide whether the law should be repealed, says Runner, who is a former state senator.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.

Comments | 4 Responses

  • i cant believe this!! me and my sister just got two i-pads for $42.77 each and a $50 amazon card for $9. the stores want to keep this a secret and they dont tell you. go here PennyOrder.com

  • How generous. With Prop. 13 on the books, Amazon will pay almost no property taxes on its warehouses. And with the whole Amazon sales cycle fully automated, it will need about 1/15th as many employees as the comparable number of real bookstores, employing real people, to provide comparable warehousing and distribution service. This is a case of wanting your cake and wanting to eat it too. The State of California deserves more respect that Amazon grudgingly allows. Carpetbaggers.

  • Book sales lost to Amazon.com are already lost. The cries of the book stores were that Amazon did not pay sales taxes and did not hire experienced staff to walk the floors of a brick-and-mortar store. But, Amazon.com is not just a book store. My book purchases are minuscule compared to electronics, household items, and computer parts. Surely I don't require a bookstore employee to assist me with a 7-dollar Harry Potter move. Nor would I seek advice about enterprise-class SATA drives for a RAID enclosure. Amazon is new way of doing business. You can't turn back the clock. I do visit "real" bookstores on occassion. Not the mom-and-pop stores, which are nowhere to be found now. But a Borders or B&N. My last trip looking for a specific book was a bust. I ended up logging in to Amazon.com to buy Sugar Ray's biography...the "real" store did not have it. I fail to see how anything would satisfy BobJacobson's logic, except that Amazon goes out of business and gives over millions in cash to former book store owners, so they can revive their business. Oh...we'd better shut down the internet too. Then everyone can return to driving from store to store to find books. Then revive Tower Records (sorely missed) to get our music and movies. Then open call centers for the bookstores because they will be flooded with phone calls asking if they have this book or that book...because consumers are tired of driving around. 'Course, we could also lower gas prices...you know...since we're turning back time to the 1980s...

  • I'm sick and tired of cry babies. Things change all the time and technology makes things change even faster. Want to know why some brick and mortar stores are going out of business? It's NOT solely because of internet retailers, there are many factors: 1. Internet stores don't have huge overhead, and can therefore offer lower prices on their goods 2. Gas prices are astronomical and some folks would prefer to shop online rather than drive to a "store" and have to pay "store" mark ups. 3. Brick and mortar businesses have long marked up their wares huge percentage points. The internet leveled the playing field and gave MORE vendors opportunities to make money via internet based stores...so MORE folks were making MORE money. Big businesses took a hit - HOWEVER - lots MORE little shops, not just Amazon, were enjoying some online success. I'm also sick to death of politicians mispending and misappropriating our hard earned and easily spent tax dollars - then scrambling to penalize those who are actually fiscally responsible, those who are ahead of the curve in adapting to change and those who are genius enough to create their own livlihoods. The econony was being stimulated just fine by regular folks spending their hard earned dollars wherever and however they pleased. People are still spending money - its just that less of it is going to brick and mortar stores. The advent of the personal computer did the same thing with email and the US Postal Service. While email has mostly replaced personal letters and correspondence, the post office is having to adapt as well. Now instead of letter mail, the USPS has ramped up its package shipping capabilities. UPS and FEDEX have also gained - someone is making out shipping all the online purchases. Bottom line is that things change and those who adapt quickly and intelligently do well. Quit with the cry baby crocodile tears and figure out how to best adapt your business to the real, changing world.

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