California Jumps Into the Argument

California has joined those states pushing Amazon to pay sales taxes on Internet purchases made within their borders.

And Amazon is pushing back.

Yesterday, Dow Jones Newswires reported here:

In a letter to California's Board of Equalization, which oversees the collection of property taxes, sales taxes and other fees, Seattle-based Amazon said four bills introduced to the state legislature are unconstitutional because they would ultimately require sellers with no physical presence in California to collect sales tax merely on the basis of contracts with California advertisers.

"If any of these new tax collection schemes were adopted, Amazon would be compelled to end its advertising relationships with well over 10,000 California-based participants in the Amazon 'Associates Program'," wrote Paul Misener, Amazon's vice president for Global Public Policy, in a letter dated Feb. 24.

This is in line with Amazon's previous stance toward other states that have tried to collect sales taxes because the company is operating within their borders.

I've written extensively about this subject before, including here, here and here.

States have gone after Amazon for sales taxes, claiming two different kinds of physical presence:

• Amazon's Associates Program allows Internet users to advertise Amazon on their websites and earn money from any sales that result. When North Carolina, Rhode Island and Colorado argued that this program constitutes a physical presence in their states, Amazon shut down the program in those states. This is, of course, the same strategy the company is employing in California.

• When Texas argued that Amazon's distribution center in Irving constituted a physical presence in the state, Amazon announced the distribution center was owned by its subsidiary, Amazon.com KYDC LLC, and not by Amazon itself ... even though the subsidiary is located at Amazon's corporate headquarters. Amazon announced it would close the distribution center next month if Texas doesn't back down.

I think that the second bullet above is going to become more of an issue in the future. Readers of this blog may recall that on January 31 here, I reported on the conference call between Amazon and its stock analysts. This is the answer from the Seeking Alpha transcript to a question posed by the analyst from Jefferies & Company who asked about the number of distribution centers Amazon had at the end of 2010:

We had approximately 52 at the end of 2010. We added 13 last year. We will add more fulfillment centers this year. We ... aren't saying how many yet because again we're trying to determine what the growth rate will be.

I doubt that the tax dodge of having a "subsidiary" operate the distribution center will continue to hold up as Amazon increases its physical presence around the country.

The open question is whether the states have the courage to face anger from their citizens when Amazon pulls jobs or, in the case of the Associates program, potential money away from people during a tough economy.