Under the current system, an Internet company has to collect taxes only in states where it has a physical location. For most companies, that means the state in which it has its headquarters.
When Jeff Bezos had the idea for Amazon in the mid-1990s, he explored setting up shop on a tax-free Indian reservation. Foiled in that goal, Bezos chose the state of Washington, which had an abundance of software programmers, but a relatively small population.
“It made no sense for us to be in California or New York,” he said in an unguarded 1996 interview.
For years, Amazon rejected the notion that it should collect money in states where it had no employees. Consumers are supposed to add up their Internet purchases and pay the appropriate tax directly to their state revenue collectors. In practice, however, few do, and enforcement is minimal.
In recent years, states struggling in the recession became more aggressive toward Amazon. Texas, New York and California all pursued the company over the tax issue. Amazon began making deals to collect the tax, while simultaneously building warehouses that would bring it closer to its customers, bringing same-day delivery within reach.
Andy Ross, the former owner of Cody’s, the famous Berkeley bookstore that went out of business in 2008, sees “a little irony” in these developments.
“As always, Amazon is nimble enough to make lemons out of lemonade,” said Ross, who was regularly outraged by the tax issue when he was competing against the e-commerce company. “But there is no question that the free ride it received for 18 years on the sales tax issue gave it a huge competitive advantage.”
In August, an Amazon executive testified before Congress that all “sellers should compete on a level playing field” and that the states really needed the tax money, which was estimated to be more than US$10 billion annually.
When the Senate introduced the legislation in February, Amazon wrote to the sponsoring senators to thank them.
Amazon chief financial officer Thomas Szkutak dismissed any ill effect from legislation, telling reporters this week that “certainly we’ll continue to have a good business in those states.”