Trump’s Bruising Tweet Highlights Amazon's Lingering Tax Fight

  • Online retailer doesn’t collect sales tax from merchants
  • Supreme Court may revisit 1992 ruling establishing precedent

Amazon is causing 'great damage to tax paying retailers,' President Donald Trump said in a Twitter post Wednesday, causing shares in the online retailer to fall. Bloomberg's Cory Johnson has more on 'Bloomberg Markets.' (Source: Bloomberg)

Follow @bpolitics for all the latest news, and sign up for our daily Balance of Power newsletter.

President Donald Trump waded into a longstanding scrap between online retailers and their brick-and-mortar rivals with a Twitter posting Wednesday about Inc. and taxes.

And he has a point -- though the Seattle-based online giant has taken steps to reduce its tax advantage in recent years -- retail industry specialists say.

Amazon began collecting sales taxes on purchases in all states that levy them earlier this year, despite an exemption that allows online retailers to avoid collecting them in places where they don’t have a physical presence. But Amazon still avoids charging shoppers sales taxes when they buy from one of its third-party vendors -- sales that make up about half the company’s volume.

Follow the Trump Administration’s Every Move

Untaxed third-party sales might provide an advantage over brick-and-mortar retail chains, which have their own robust online operations but have to collect sales tax on all purchases in states where they have physical presences. Many large chains have stores in almost every state.

“Amazon is doing great damage to tax paying retailers,” Trump said in a pre-dawn Twitter post Wednesday. “Towns, cities and states throughout the U.S. are being hurt -- many jobs being lost!”

‘Intrinsic Fairness’

Amazon founder Jeff Bezos owns the Washington Post newspaper, which Trump has frequently attacked over its investigative coverage and editorial criticism of his campaign and administration. The president has repeatedly targeted the retailer in tax-related Twitter messages.

A spokesman for Amazon declined to comment.

Trump’s latest broadside against Amazon comes at a tumultuous period in his relationship with corporate America. Citing remarks in which Trump equated neo-Nazis to counter-protesters, several corporate executives quit White House advisory groups this week before the president said Wednesday the groups would be disbanded.

It was unclear whether Trump’s remarks about Amazon signal his willingness to campaign for federal legislation to address online sales taxes. But any support for brick-and-mortar retailers should help, said Jim Taylor, chief executive officer of Brixmor Property Group Inc., which owns open-air shopping centers.

“It’s tough to predict what may or may not happen,” Taylor said. “Yet, there is an intrinsic idea of fairness here that appeals to most people about the collection and payment of taxes.”

Quick Delivery

In its early days, Amazon capitalized on its status as an online retailer and built warehouses in small states like Nevada and Kansas close to big states like California and Texas. That allowed Amazon to sell goods to shoppers in those populous states without collecting sales taxes since it lacked a physical presence. As Amazon grew, its focus shifted to quick delivery, requiring it to build warehouses closer to big cities and in big states. It owes sales taxes in those locales.

Despite a 1992 Supreme Court ruling that established the precedent for exempting online retailers from sales taxes, various states have enacted “Amazon laws” to tax online sales the same way that brick-and-mortar sales are taxed. About two dozen states have signed on to an agreement that allows retailers to voluntarily collect sales taxes, and Amazon is one that does so.

At the federal level, several bipartisan bills have been introduced to allow states to mandate collection of the taxes, with the most recent one re-introduced this year and endorsed by Amazon. A previous bill passed the Senate.

Independent Merchants

The sales-tax treatment for third-party merchants is the next tax fight looming for Amazon. Independent merchants that list items on Amazon’s web store pay the company a sales commission as well as fees for packing and stowing products. States and local government lose approximately $5 billion a year in taxes from Amazon marketplace commerce because merchants don’t collect them and shoppers don’t pay them after the fact, said James Thomson, a former Amazon employee who is now a consultant for e-commerce merchants.

In many states, the burden of paying sales taxes for online purchases is on the buyer, who is supposed to list online transactions on tax returns and remit any taxes due. In practice, few shoppers do this and states don’t enforce it.

Merchants who pay Amazon to stow and pack their products don’t know precisely where their inventory is stored, since they delegate that to Amazon, Thomson said. They can pay Amazon a fee to collect taxes for them, but few are even aware of that option, said Thomson.

“Amazon has no interest in communicating this to its sellers because that means potentially higher prices,” Thomson said. “Amazon implicitly creates this problem.”

The company doesn’t break out how much revenue comes from third-party sales.

Some large Amazon merchants have been subpoenaed by states looking to collect unpaid taxes. Those states can also subpoena Amazon for records about where inventory is stowed, Thomson said. He said he helped negotiate a tax-amnesty deal between Amazon merchants and 24 states covering 40 percent of the U.S. population.

‘Full Taxpayers’

“The president has a point in that the academic research indicates there are significant impacts in shifting shoppers from firms that collect taxes to firms that don’t collect taxes," said William Fox, an economics professor at the University of Tennessee who has studied online sales tax issues for 20 years and has given expert court testimony. “It’s hurting brick-and-mortar stores and benefiting stores with remote presences. Amazon is somewhere between those two.”

When asked about Trump’s tweet on Wednesday during a call with reporters, Target Corp. Chief Executive Officer Brian Cornell declined to comment beyond saying “We’re full taxpayers.”

Getting rid of the online tax exemption would help the retail industry, according to Craig Johnson, president of consulting firm Customer Growth Partners. But the boost would be muted because Amazon is already collecting the tax.

“It’s not as big of an issue as it used to be,” Johnson said.

Revisiting Ruling

The Supreme Court ruling said states couldn’t require out-of-state retailers to collect sales taxes from consumers unless those retailers had a physical presence -- through branches, warehouses or employees -- where the consumers were located. Largely because of that ruling, which predated the rise of widespread online retailing, states miss out on $23.3 billion a year in sales taxes from online and catalog purchases, according to a 2012 finding by the National Conference of State Legislatures.

The issue will likely land before the Supreme Court again, according to Fox. Justice Anthony Kennedy suggested in 2015 the court revisit the 1992 ruling.

The ability for states and local governments to collect revenue hasn’t kept up with the proliferation of online shopping. And that’s taking away money that could be spent on public safety, parks and recreation, education and infrastructure investment, according to David Parkhurst, general counsel of the National Governors Association.

“The retailers and business and job-creators in their communities should not be put at a disadvantage because they’re following the laws and out-of-state retailers are not,” said Max Behlke, NCSL’s director of budget and tax.

Behlke, who has testified in several states about the issue, added that online marketplace EBay Inc. is the biggest opponent of measures to impose sales tax collections on third-party sellers.

EBay opposes new sales tax burdens that would make it harder for small business retailers to use the Internet to grow, said Penny Bruce, a spokeswoman for the company.

South Carolina Lawsuit

South Dakota, which relies heavily on sales taxes, is attempting to move a case to the Supreme Court to get a reevaluation of the 1992 case.

And South Carolina in June told Amazon it owed almost $12.5 million in uncollected taxes, penalties and interest from third-party sales. That signals states want to collect taxes on this part of Amazon’s business, said Scott Peterson, vice president of U.S. tax policy and government relations for Avalara, a sales tax automation software company.

“States are going to try many different tactics as part of their strategy to capture tax revenue from online sellers,” he said. “The facts show that this trend will accelerate in the coming years.”

— With assistance by Matthew Boyle, and Ben Brody

    Before it's here, it's on the Bloomberg Terminal.