Amazon Has to Fear Marketplace Legislation, Not Internet Sales Taxes

On Monday, the Trump administration urged the Supreme Court to allow states to require online retailers to collect a state sales tax even if they do not have a physical presence in the state. This is a concerning development for many Internet companies, but for Amazon Inc. (AMZN) the main fight is elsewhere.

South Dakota is currently involved in a dispute with three e-commerce companies unwilling to collect the taxes, namely Wayfair Inc (W), Overstock.com Inc (OSTK) and Newegg Inc, and has asked the Supreme Court to reverse its landmark 1992 ruling on the issue.

With more than 6,000 state and local jurisdictions across the country levying sales taxes, the Supreme Court in 1992 ruled that collecting sales taxes on purchases would be an unfair burden for online sellers and would restrict interstate commerce.

More than 25 years later, some call this decision dated.

“Given the ubiquity of affordable products that help businesses calculate, collect and remit sales and use taxes, there is little to no burden imposed on remote sellers,” said the National Retail Federation, which argues that online retailers have had an unfair advantage over brick-and-mortar retailers because they don't have to comply with state and local tax laws. “Technology has simply eroded those distinctions.”

States and municipalities could bring in additional revenue of between $8 and $13 billion if they could force companies to charge a sales tax, according to a report from the U.S. Government Accountability Office.

Winners and Losers

Trump has in the past attacked tech giant Amazon for not paying taxes on Internet sales. But in March of 2017, the firm announced it would begin collecting sales taxes in all 45 states that currently have a statewide sales tax. It has also lobbied for the Marketplace Fairness Act, which would make paying Internet sales taxes mandatory and is a member of the Marketplace Fairness Coalition along with Walmart (WMT), Best Buy (BBY) and others. (See also: Big Tech Spent Record Amounts on Lobbying Under Trump)

There are a few reasons for this.

As retailers like Amazon work to reduce delivery times, their physical presence is growing across the country, which makes them responsible for collecting state sales taxes under the current laws. A law forcing other companies to collect state and local taxes as well, hurts competitors like Overstock and Wayfair. It also hurts small-business owners selling their products all over the country via the Internet as the new compliance costs will affect their bottom lines. eBay (EBAY), which is often the choice of less experienced and seasoned sellers, says it "opposes any attempt to impose Internet sales tax collection burdens on small Internet-enabled businesses." 

There is also a loophole Amazon enjoys. It does not collect state sales taxes on purchases made from third-party vendors, which make up nearly half of all purchases from the website. If the Supreme Court reversed the 1992 ruling, Amazon's third-party sellers may have to raise their prices, but Amazon would not be responsible.

But a few states are working on closing this loophole. Minnesota, Pennsylvania, Rhode Island, and Washington have recently enacted laws that require marketplace facilitators like Amazon to calculate, collect and remit tax on sales sold by third-party sellers. This takes the administrative burden of filing and collecting the taxes off third-party vendors and places it directly on Amazon's shoulders.

The fact that Amazon refuses to collect taxes on behalf of its sellers is particularly irksome to states since these goods are often stored in Amazon's warehouses. It is currently fighting a legal battle with South Carolina, which has said Amazon owes it $57 million in back taxes since 2017 and it could lose a further $500 million over the next five years if Amazon does not begin collecting taxes on behalf of its third-party sellers. (See also: South Carolina: Amazon May Owe $500M in Sales Tax)

But Amazon will not back down as it did earlier. "If South Carolina or other states were successfully to seek additional adjustments of a similar nature, we could be subject to significant additional tax liabilities. We intend to defend ourselves vigorously in this matter," it said in a filing.

Scott Peterson, Vice President of U.S. Tax Policy and Government Relations for tax compliance consultancy Avalara, Inc, said Amazon would have to devote resources toward dramatically improving the quality, quantity and timeliness of the information it receives from third-party sellers and its ability to track and remit sales tax payments. "Since Amazon is already collecting and remitting sales tax for its direct sales, it is well ahead of the game. Other marketplaces may want to rely on third-party service providers that automate sales tax collection and remittance," said Peterson.

The Supreme Court will hear arguments in the case in April and make a decision by the end of June, when its current term ends.