Throughout most of its existence, online retailer Amazon.com aggressively avoided having to collect state sales taxes from its customers. Its 5 to 10 percent price advantage relative to local retailers who have to collect the tax wasn’t something that Amazon was willing to give up.
More recently, however, Amazon’s business strategy seems to have shifted. In order to provide faster delivery times to more of its customers, Amazon has opened up warehouses and distribution centers in a growing number of states (Florida being the most recent example), even though doing so means the company will be subject to the same sales tax collection requirements as Wal-Mart, Home Depot, mom-and-pop bookstores and every other brick and mortar retailer.
But recent events in Minnesota confirm that while sales tax dodging is less central to Amazon’s business strategy than in years past, the company still thinks that not collecting the tax is an advantage. A new law just passed by Minnesota’s legislature redefines what constitutes a “physical presence” in the state, and it means that Amazon has enough affiliates in Minnesota to have to begin collecting the state’s sales tax this month. So in order to save some nickels and dimes, Amazon has decided to cut its ties with businesses based in the Gopher State so it can keep selling to Minnesotans tax-free.
This development points toward a need for Congressional action for lots of reasons, including these two:
First, it reinforces the point that local retailers are being harmed by their online competitors’ ability to dodge sales tax collection requirements. Why would Amazon bother cutting ties with Minnesota businesses if it didn’t think its market share would suffer from having to play by the same rules as companies with actual stores and employees in Minnesota?
Second, it highlights the degree to which online shopping sales tax laws have become an indefensible patchwork. In geographically large and heavily populated states like Florida and Texas, Amazon has little choice but to have a “physical presence” in the state (and collect sales tax) if it wants to offer reasonably fast delivery times. In other states, however, shipping products from outside the state’s borders is much less of a logistical problem.
There’s no question that Amazon is capable of collecting sales taxes in Minnesota, particularly since the state has already taken steps to simplify its sales tax system by adhering to the Streamlined Sales Tax Agreement. In fact, Amazon said it plans to begin collecting Minnesota sales taxes as soon as the federal Marketplace Fairness Act (which it supports and which has passed the U.S. Senate) is enacted into law. In the meantime, however, Minnesota is out of options for getting Amazon to play by the same rules as other businesses selling to its residents. Amazon’s recent actions make clear that just because the company can do what’s right, that doesn’t mean it will do so voluntarily.