Advantage Amazon

State, retailer negotiating on sales tax, but law favors Seattle firm

Correction: An earlier version of this story mispelled “Ronald Mann.”

WITH BLACK FRIDAY not far off, business leaders and municipal officials have been clamoring for the Patrick administration to act fast to require Amazon.com to collect the state’s 6.25 percent sales tax now that the company has a physical presence in Massachusetts.

State officials are currently negotiating with Amazon, but a speedy resolution may be unlikely. The Seattle company’s recently acquired Massachusetts operations – a software development company and a robotics manufacturer – do not meet the Bay State’s criteria for physical presence because they are separate legal entities involved in businesses unrelated to Amazon’s core retail operations, according to tax law experts.

Brick-and-mortar retailers operating in Massachusetts are required to assess sales tax on purchases and remit those taxes to the state. But Web-based retailers located beyond the state’s borders who sell products to Massachusetts residents fall into a different category. According to a 1992 US Supreme Court case, Quill Corporation v. North Dakota, an out-of-state company can be compelled to collect a state’s sales tax only if it has a physical presence (a “substantial nexus” in Supreme Court-speak) in the state. The physical presence can be offices, warehouses, or employees.

Amazon now owns two Massachusetts-based subsidiaries, a2z Development Center, a Cambridge software development company, and Kiva Systems, a North Reading robotics manufacturer. Both firms are separate legal entities engaged in businesses that are not directly related to Amazon’s retail operations.

Columbia University Law professor Ronald Mann, who studies e-commerce issues, said that Massachusetts “probably can’t show” that the activities of the two companies are directly related to fulfilling orders for Amazon online retail customers. “As long as the firm[s] remains separate entit[ies], it’s hard to say that Amazon has a physical presence,” he said.

Sylvia Dion, a Westford-based tax consultant who specializes in multistate tax issues, said Amazon’s two Massachusetts companies do not create “nexus” for the company under Massachusetts law. “Amazon can own other companies,” said Dion. “If those other companies are in Massachusetts, that does not mean that Amazon, the selling company, has to charge sales tax on customers in Massachusetts.”

Dion said some states like Virginia have responded by passing “Amazon laws,” which define physical presence in a way that includes all the subsidiaries that are owned by an out-of-state company. She argued that Massachusetts would have to pass a similar type of law to require Amazon to begin collecting sales tax on purchases made by state residents.

Jon Hurst, president of the Retailers Association of Massachusetts, which is pushing for Internet retailers to collect sales taxes, said Amazon should follow “if not the letter of the law, the spirit of the law, and should be collecting sales tax right now in Massachusetts.”

Hurst claimed that Amazon has been trying to avoid state sales taxes around the country by creating different subsidiaries with different tax structures. “That’s arguably the case here in Massachusetts with their research center in Cambridge and robotics manufacturing center in North Reading,” he said. “You can go and change the statute and close loopholes and make sure that you can draw a straight as opposed to a dotted line with these subsidiaries.”

The Legislature failed to advance several proposals that would have addressed online sales tax issues before the end of formal sessions in July.

Congress may ultimately have to step in to deal with interstate e-commerce. “It wouldn’t take much to push Congress over the line to give the states…authority to tax online retailers however they want,” Mann said. “If the states got more [sales tax] money, it would be easier to balance the federal budget.”

State Treasurer Steve Grossman estimated last month that Massachusetts could bring in $339 million in state sales taxes each year from online companies such as Amazon.

“A Congressional solution is best for everyone – and supported by all parties,” Secretary of Administration and Finance Jay Gonzalez said in a statement provided to CommonWealth.  “In the absence of such a solution, we have had productive conversations with Amazon officials about a solution that works for everyone and we hope to close out those talks soon.”

A department spokeswoman declined to provide details on those talks or the specific issues under consideration.

With the Legislature and Congress out of the picture in the short-term, what kind of deal could Patrick administration officials possibly negotiate with Amazon? New Jersey’s recent agreement with Amazon may provide some clues.

After more than a year of negotiations, Amazon finalized an agreement with the Garden State in May to build two new distribution centers there.  In return, Amazon gets to defer collecting the state’s 7 percent sales tax until July 2013 and is eligible to receive a business employment tax break. New Jersey expects to see up to $40 million in new annual revenues from the deal and 1,500 new full-time jobs.

At least 13 other states already collect or plan to collect sales taxes from Amazon. “They have cut deals to start collecting sales tax on a date specific in exchange for perhaps locating new facilities in certain states, such as the recent deal in New Jersey,” said Hurst. He argued that Amazon may realize that their sales tax advantage is ebbing away and that the company needs to offer new customer services like same-day delivery, which would require new warehouses closer to regional customers.

Currently, there are no Amazon distribution centers in New England, according to a new Amazon.com distribution study done by MWPVL International of Montreal. The nearest ones are in Pennsylvania.

Michelle Hanlon, an accounting professor at MIT’s Sloan School of Management, said she believes Amazon will still have a competitive advantage over brick-and-mortar retailers even if the firm starts collecting state sales taxes.  “It’s more convenient for people,” she said of Internet retail.

Peter Cohan, a consultant and venture capitalist who teaches business strategy at Babson College, said Amazon could figure out a way to lower costs so the company can continue to offer low prices and spare its customers a sales-tax driven price hike. On the other hand, Cohan said, Amazon may decide to sidestep the sales tax price hike by pulling its subsidiaries out of Massachusetts. “I don’t think that’s the most likely scenario, but in theory it could happen,” Cohan said.

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Gabrielle Gurley

Senior Associate Editor, CommonWealth

About Gabrielle Gurley

Gabrielle covers several beats, including mass transit, municipal government, child welfare, and energy and the environment. Her recent articles have explored municipal hiring practices in Pittsfield, public defender pay, and medical marijuana, and she has won several national journalism awards for her work. Prior to coming to CommonWealth in 2005, Gabrielle wrote for the State House News Service, The Boston Globe, and other publications. She launched her media career in broadcast journalism with C-SPAN in Washington, DC. The Philadelphia native holds degrees from Boston College and Georgetown University.

About Gabrielle Gurley

Gabrielle covers several beats, including mass transit, municipal government, child welfare, and energy and the environment. Her recent articles have explored municipal hiring practices in Pittsfield, public defender pay, and medical marijuana, and she has won several national journalism awards for her work. Prior to coming to CommonWealth in 2005, Gabrielle wrote for the State House News Service, The Boston Globe, and other publications. She launched her media career in broadcast journalism with C-SPAN in Washington, DC. The Philadelphia native holds degrees from Boston College and Georgetown University.

Hurst, the head of the retailers association, said it benefits Amazon to delay action as long as it can, but local stores want to level the playing field as quickly as possible, preferably next year. “We’re hoping it’s sooner rather than later,” he said.

Amazon did not respond to a request for comment.