April 29, 2011, 11:33 AM

Online sales tax proposals arise in a new crop of state and federal legislation

From Arkansas to Texas to Washington, D.C., elected officials are pushing for new ways to force Internet retailers to collect sales tax.

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With Arkansas joining the club last month, there are now five states with a so-called "Amazon tax" law. Like similar legislation in New York, North Carolina, Rhode Island and Illinois, the new Arkansas law requires Internet retailers to collect sales tax if they do business with in-state affiliate web sites.

"We have a lot of local businesses in Arkansas, both small and large companies, that collect sales tax and we're trying to level the playing field," a spokesman for Gov. Mike Beebe says.

The downside of these laws is that e-retailers like Amazon.com Inc. and Overstock.com Inc. have responded by severing their business ties with affiliates, in some cases causing affiliates to move to other states to avoid losing business.

But that strategy will become less effective if Sen. Dick Durbin (D-Ill.), the assistant majority leader, succeeds in pushing through federal legislation that would authorize dozens of states to require online retailers to collect sales tax. Durbin's bill, which he planned to introduce this spring after similar legislation made little headway in the previous Congress, aims to override existing federal law that limits tax collection requirements to retailers with an in-state physical presence like stores and distribution centers. Participation would be open to states that have simplified their sales tax laws as part of the Streamlined Sales Tax Project, which now has 26 member states.

A new state bill in Texas, meanwhile, seeks to erase any doubt about when an out-of-state Internet retailer has a physical presence in the state and, therefore, must collect sales tax on purchases by Texas residents. Amazon has contended that its distribution facility in Texas is owned by an Amazon subsidiary, and therefore not a physical presence tied to the Amazon retail site. But the bill clarifies that a retailer is "engaged in business in this state" and therefore responsible for collecting sales tax if it has "substantial ownership interest" in facilities such as distribution centers. Sponsors say they hope the bill will reach the governor's desk before the current legislative session ends May 31.

Texas House Bill 2043, introduced last month by state Rep. John Otto, a Republican, was designed to withstand any court challenges, Otto says. "I drafted what I believe will outlast any Supreme Court challenge," he tells Internet Retailer.

The bill follows an announcement in February by Amazon that it will close its distribution center in Texas and kill plans to build more distribution facilities in the state, where its distribution facilities are operated under an Amazon subsidiary. Dave Clark, Amazon's vice president of North American operations, said that the world's largest online retailer could not come to an agreement with the Texas Comptroller's Office over how to treat its physical operations in the state for tax purposes.

Last October, the state issued Amazon a bill for $269 million for uncollected sales tax. Amazon has filed a suit in a Texas county court in Austin in an effort to get the audit reports related to its tax bill, but has not commented further on the matter.


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