Amazon’s Long War on Sales Taxes

Amazon has avoided sales taxes since its inception

by Brian Leubitz

Amazon is a product of the 90s internet boom, you know that part of the story already.  But unlike many of their contemporaries, they saw not only the mere presence of the internet being the next step forward, but also a nice little legal loophole:  Quill v North Dakota.

Quill was a case from 1992 that essentially said that retailers who sent across state lines through the mail did not need to collect sales taxes for states that they had no physical connection to.  Jeff Bezos, CEO of Amazon, was keenly aware of this fact.  An article in the Wall Street Journal looks back at Amazon’s use of this natural advantage against brick and mortar stores:

Amazon’s Mr. Bezos has said he established the company in Washington partly because it has a tech-savvy but relatively small population, so state taxes wouldn’t affect many potential customers.

“It had to be in a small state,” he said in a 1996 interview with Fast Company magazine. He even mulled basing Amazon on a California Indian reservation because he thought it would allow his company to avoid collecting sales taxes in the state, he added. (WSJ)

Over the years, Amazon has gone to great lengths to ensure that they didn’t cross the very murky line into “nexus” with states that they were targeting for their sales tax schemes.  Along with California, this list included Texas and Illinois.  Just how far did they go? Well, how about this:

For travel to California, some former employees recall being instructed by lawyers and managers to use special business cards. Rather than distributing typical “” cards, they used ones from “Amazon Digital Services,” a wholly owned subsidiary that sells digital content such as books and music. Representing a subsidiary, rather than core retail operations, would help prevent state authorities from going after Amazon, the people said.

“It’s a very unscrupulous practice,” said Ms. Yee of the California tax board. She said Amazon employees visiting the state on business should present themselves clearly. If they don’t, she added, “I think it’s a conscious attempt to evade California’s tax laws.” She declined to comment on whether the practice was illegal. It couldn’t be determined to what extent Amazon currently uses the method.

But Amazon’s connections to California aren’t limited to the affiliates that they unceremoniously dumped after the budget bill passed,, an Amazon search subsidiary, is based in Palo Alto, and the company has many employees in the state.  However, they claim that as they do not sell within the state, most of the employees are engineers or engineering support, that these employees should not count as the nexus required by Quill.

Ultimately, something has to give, as American taxpayers really don’t need to subsidize anymore.  Sen. Durbin (D-IL) is now pushing the Main Street Fairness Act, a measure that would create a single national sales tax with one reporting mechanism for sell by mail retailers.  Interesting, Amazon has chosen to support the measure as an easing of reporting deadlines.  The bill is unlikely to pass in current governing climate in DC, and Amazon has to know that.  For a multi-billion company, the costs of reporting the taxes would be essentially negligible.  Whether they are using their support cynically to fight the taxes in the states is up for debate.  

3 thoughts on “Amazon’s Long War on Sales Taxes”

  1. Many reputable companies do collect and pass on state sales taxes, for whateve reason. May I suggest that in the absence of rational laws on the topic, we all give our business to such companies, and not to yet another rent-seeking behemoth gaming the system?

  2. Amazon has badgered and coerced state legislatures into giving into its demands, but thankfully some state legislatures can see beyond the initial jobs and promises. This is about long-term tax fairness.  

  3. Just a brief clarification – The Main Street Fairness Act (MSFA) does not

    create a single national sales tax rate.

    Rather, the MSFA authorizes states to compel remote retailers to collect sales tax due at the time of a transaction, but this authority is only granted AFTER the state adopts the simplification and standardization procedures of the Streamlined Sales and Use Tax Agreement (SSUTA – The SSUTA is critically important in this discussion, as it is the result of over a decade of effort by 44 states and over 85 large and small businesses (yes, including Amazon) to resolve the three primary points of undue burden cited the 1967 Supreme Court case National Bellas Hess v. Illinois Department of Revenue. This ruling set the stage for this debate on remote retailers’ (then mail-order catalogs) obligations to collect sales tax due at the time of purchase when, in its majority (5 to 4) opinion, the court ruled:

    the many variations in rates of tax, in allowable exemptions, and in administrative and record-keeping requirements could entangle National’s interstate business in a virtual welter of complicated obligations to local jurisdictions.

    (emphasis added)

    This quote demonstrates the ruling’s basis in complexity and burden, which has rippled forward to create today a tidal wave of unanticipated consequences. Since Bellas Hess, out-of-state retailers have been shielded from the obligation to collect sales tax, based purely on the notion that it would place too much of a burden on their businesses. To provide a sense of perspective, keep in mind that the year this ruling was issued was the same year the floppy disk was invented at IBM. It was also one year before the first plans were developed at MIT to create ARPANET, which would lay the foundation for the internet we know today.

    The SSUTA resolves the challenges by creating a standard set of rules regarding:

    1. jurisdictional boundaries and tax rates

    2. product definitions for exemptions

    3. reporting and remittance procedures

    The later Quill ruling in 1992 made it clear that interstate sales tax collection is a matter that only Congress has the authority to resolve, and thereby provide legal certainty for states, retailers, and consumers.

    Finally the Main Street Fairness Act will do this. It will make sales tax easier for all retailers large and small, online or offline.

    R. David L. Campbell

    Chief Executive Officer, FedTax (inventors of TaxCloud –

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