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Amazon Case Exposes Internet Tax Complexity

Nate Mook of BetaNews.com reports here that Texas is doing an investigation to determine whether Amazon owes the State of Texas millions of dollars in back sales taxes for items purchased by customers in the Lone Star State.   Amazon, on the other hand, believes it has fully complied with the law. 

Basically, in the State of Texas, no sales taxes need to be collected from a retailer unless the retailer has a physical presence in the state. There is a distribution facility located in Irving, Texas to help fill Amazon orders in Texas.  Amazon claims the distribution facility is owned by one of its subsidiaries,  Amazon.com.kydc, Inc., and not Amazon.  If so, the physical presence of a subsidiary does not require Amazon to collect sales taxes.  Some records in Texas list Amazon as the owner of the facility rather than the subsidiary which is creating the confusion.

Amazon currently charges sales tax for items shipped to Kansas, Kentucky, North Dakota and Washington State.

While outside of my particular bailiwick, my colleague Cyrus Chin here at Looper Reed who does a lot of tax work says: ”As state sales tax revenues continue to fall as a result of online sales, more states are likely to enact legislation that disregards the ‘entity isolation’ practice and requires online retailers to collect sales tax if they have an affiliate or subsidiary located in the state.”

Amazon is fighting the State of New York which recently enacted a law that requires all out-of-state retailers to collect sales tax if the retailer advertises in New York.  Amazon sued New York challenging the constitutionality of this provision.

The bottom line is that if you are selling online, life may start to get more difficult related to the collection of sales taxes in the various states.  Does this mean I will go to the Barnes & Noble down the street rather than order from Amazon and still pay taxes?