The National Pulse

Amazon Warriors: Local Businesses, States and the Senate Take Aim at Online Retailers


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Photo of Greg Rozman by Bill Cramer

Rozman Bros., a long-standing family-owned appliance and furniture retailer, is often treated like a wallflower at the big dance. Price-conscious shoppers come in to check out merchandise in the 55,000-square-foot showroom of the Harrisburg, Pa., store, putting sales associates through the paces as they kick the tires on flat-screen TVs and other big-ticket items. Increasingly, however, they walk out empty-handed, opting to book their purchases with Amazon or other online retailers that don’t bother to collect state sales tax.

“One of the things Amazon has done is shut down family businesses,” says co-owner Greg Rozman, who sometimes eats the cost of the 6 percent local levy to make a sale, stretching his already thin margins. “All of a sudden the new kid in the playground is the bully and he’s beating up everybody.”

Internet retailers are required to collect state tax only when they sell to customers living in a state where they have a physical presence, such as a store or distribution center. Otherwise, the onus typically falls on consumers to pay a use tax, an unregulated responsibility frequently neglected.

Rozman, whose business is still managing to make a profit, has testified before Pennsylvania state legislators about what he contends is a significant disparity between online sellers and their brick-and-mortar counterparts. His concerns represent a growing backlash by traditional retailers and cash-strapped state legislatures nationwide. Several states, including California, Connecticut and Illinois, are enacting “Amazon tax laws” as they go after uncollected state revenue. Pennsylvania has yet to pass similar legislation.

“We’re continuing to go state by state passing laws, until the federal government acts or until every one of the states has passed a law disallowing Amazon from exploiting the sales tax loophole,” says Danny Diaz, a spokesman for the Arlington, Va.-based Alliance for Main Street Fairness, a lobby for retailers small and large, including heavyweights such as Wal-Mart Stores Inc. and Target Corp.

The constitutionality of these laws remains to be tested, but the freewheeling approach taken by Amazon, Overstock.com and other major Internet sales powerhouses has legal precedence. Its roots lie in interpretations of the commerce clause, which gives the federal government the power to regulate interstate trade and to prohibit actions that might impede it.

TERRA FIRMA AFFIRMED

In several landmark cases, the Supreme Court has ruled that a seller’s physical presence is necessary in a state before that state can require the business to collect sales tax on transactions made by its residents.

In a 1967 case, National Bellas Hess Inc. v. Dept. of Revenue of the State of Illinois, the court ruled in favor of a Missouri-based mail-order retailer after Illinois attempted to collect sales tax on the company’s transactions within the state. National Bellas Hess had no sales outlets, representatives or telephone listings in Illinois.

North Dakota reprised the issue in 1992, claiming that the Quill Corp., a catalog retailer of office supplies, should be subject to its use tax because the company had a licensed software program that some state residents used to place their orders. In Quill Corp. v. North Dakota, the high court nevertheless stood by its precedent. The technology argument presaged the huge advances in Internet commerce.

“North Dakota created the test case in Quill,” says Stewart Weintraub, a tax attorney in Chamberlain Hrdlicka’s Philadelphia office. “They argued that from 1967 to 1992 technology had so dramatically changed, and the evolution of commerce in the United States had so dramatically changed, that National Bellas Hess should be reversed.

“Well, technology has further evolved, commerce has further evolved, and they’re still making the same arguments now 20 years post-Quill,” says Weintraub, immediate-past chair of the ABA Section of Taxation’s State and Local Taxes Committee. “Will that argument prevail today when it was unsuccessful 20 years ago? I learned a long time ago not to predict.”

There is no question that growth in e-commerce is staggering. According to the U.S. Commerce Department, Internet sales rose to $165.4 billion in 2010, up nearly 15 percent from $144.1 billion in 2009.

Meanwhile, uncollected tax on Internet sales is expected to reach $11.4 billion by 2012, capping a six-year total of $52 billion, as forecast by economists at the University of Tennessee. With numerous states facing large deficits, lost income streams are hard to ignore.

Many of the state-enacted Amazon laws attempt to sidestep Quill by broadening the definition of physical presence. In March, Illinois enacted legislation expanding the idea to include the existence of local affiliate companies, such as couponing and deal websites that earn commissions for steering traffic to an Internet seller’s site. To stay solvent, some of those firms have moved over state lines, after Amazon said it would cut ties with them if they remained within the state.

U.S. Sen. Dick Durbin, D-Ill., contends that as more businesses use current technology, a national solution is required. In July he was the leading sponsor of the Main Street Fairness Act, a bill that would level the playing field by requiring online retailers, catalog merchants and 1-800 sellers on TV and radio to collect local taxes at the point of purchase, regardless of whether they have a physical presence in a state. The bill, also introduced by Reps. John Conyers, D-Mich., and Peter Welch, D-Vt., did not list a Republican co-sponsor.

Quill said there is no particular federal law that says a remote seller is compelled to collect sales and use taxes. That was the view of the Supreme Court,” says a senior aide in Durbin’s Washington, D.C., office. “What Sen. Durbin intends to do is change the law of the land such that it is very clear that any state that chooses to do so has the consent of the federal government to require sellers to collect this tax.”

NO DEAL ON STATE LEVEL

Seattle-based Amazon, which took in $34 billion in revenue in 2010, has historically fought moves at the state level, maintaining it would back a national solution. It has also supported the Streamlined Sales Tax project, an effort backed by 24 states to make state tax collection efforts more uniform. Its purpose is to simplify sales tax administration to ease the burden of compliance by sellers.

Amazon declined a request for an interview, but it did issue a brief statement. “We believe this needs to be solved at the federal level, and we’re working with the states, retailers and Congress to get federal legislation passed as soon as possible,” said spokeswoman Mary Osako.

Of late, the company’s stance has appeared more conciliatory. It worked out a deal with California lawmakers, who in September approved a measure giving the retailer a one-year grace period before it has to collect sales tax from customers in the state. Amazon will comply in 2012 unless federal legislation is passed beforehand.

Amazon has already demonstrated a willingness to use economic muscle to influence state laws. In Texas and South Carolina, it used the prospect of opening and closing warehouses that support hundreds of jobs to affect legislation. It is still litigating a 2008 law passed in New York. As in Illinois, the New York measure hinges on the presence of in-state marketing affiliates.

Tax attorneys have mixed opinions on whether the Durbin legislation will hold legal muster against Quill.

“You do have this little problem of the commerce clause, so you have to figure out a way to do it that doesn’t do violence to the Constitution,” says Joseph Dowley, a partner at McKenna Long & Aldridge in D.C. Dowley, former chief counsel to the House Ways and Means Committee, says that considering how dysfunctional Congress has been, he is not expecting any action soon.

Meanwhile, business owners like Rozman and countless other retailers keep trying to hold their own against what they deem an unfair competitive advantage.

“It’s not going to put them out of business,” Rozman says. “It’s just going to make it even.”

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