A Taxing Situation: Amazon’s Fight in Tennessee

Famous for offering great deals, Amazon.com (NASDAQ:AMZN) is looking for its own deal this time around.

Tennessee isn’t buying.

The online retailer is at odds with the state over the contentious issue of collecting sales taxes from customers who make purchases over the Internet. The company says it shouldn’t have to – a position that would give it a competitive advantage over other, bricks-and-mortar businesses that do collect taxes – while the state is telling the company its customers have to pony up.

Amazon has chosen southeast Tennessee to build two new distribution centers, expecting to spend $139 million to build the fulfillment centers that would create almost 1,500 full-time jobs and countless more seasonal openings in the region.

But the company will only follow through on the plans if it can be exempt from collecting sales tax from its online customers.

“We will continue to drop states who pass those affiliate laws,” Amazon chief executive Jeff Bezos told Reuters.

Earlier this week, the Tennessee Senate Finance Committee took up a bill written by Senator Randy McNally (R- Oak Ridge) that attempts to create a “nexus,” or a physical presence, in the state that would require Amazon to collect sales tax.

“The bill is simply a restatement of existing law to make sure it is crystal clear for a company who has a location in Tennessee, that they be required to collect sales tax on state purchases even though the purchase is made through a computer,” McNally said.

States currently cannot require businesses with no connection to that particular state to collect sales tax on sales of goods shipped to the state. Amazon is arguing that a fulfillment center does not constitute a “nexus.”

“Is it unfair? Yes it is.” said opponent to the bill, Senator Bo Watson, R. “The Internet is creating a market place for which the tax system that we have in Tennessee and in the United States is not flexible enough to adapt to. Until the federal government takes action, this will continue to be a problem, not just for Tennessee but for every state.”

This is not the first time Amazon has faced the problem of collecting sales tax. The company was recently handed a bill of nearly $270 million for uncollected sales taxes in Texas, and just a few weeks ago it pulled out of an agreement made with South Carolina to build distribution centers in Lexington. (South Carolina’s House of Representatives is going to consider a bill next week that would give Amazon a five-year sales tax exemption.)

“The sales tax collection is very complicated. The right place to fix this is with federal legislation,’ said Bezos.

“I would like Amazon to go ahead and build in Tennessee. It would be an economic boost for the region they build in. What I do not want is the law to be selectively enforced,” said McNally. “If they are using Tennessee services, then they should be willing to collect sales tax.”

Senator Watson said that if Amazon does go ahead and build it would generate anywhere from $6 billion to $8 billion of tax revenue to the state. “You do this to create economic churn,” he said.

But McNally maintains that the battle is about being fair to all other businesses in Tennessee.

“Do you neglect existing businesses that have been in Tennessee and paid taxes, collected taxes, and given it back to the state just for a powerhouse like Amazon? We have the law in the books and it needs to be enforced to Amazon just as it is enforced to every other retailer,” said McNally.

A vote on the Senate floor will be made next Monday.

“I think it will be a very close vote,” said McNally.