Retailers Push Amazon on Taxes

The Wall Street Journal

Wal-Mart, Target and Others Look to Close Loophole for Online Sellers Amid State-Budget Crises

Wal-Mart Stores Inc. (NYSE: WMT - News), Target Corp. (NYSE: TGT - News) and other large retailers are ratcheting up a political campaign to force Amazon.com Inc. (NASDAQ: AMZN - News) to collect sales taxes, sensing opportunity in the budget crises gripping statehouses nationwide.

The big-box stores are backing a coalition called the Alliance for Main Street Fairness, which is leading efforts to change sales-tax laws in more than a dozen states including Texas and California.

Until now, the group has been largely associated with mom-and-pop stores, spotlighting stories of small toy shops and booksellers who argue Internet merchants that aren't legally required to collect sales taxes enjoy an unfair advantage with shoppers.

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Yet the Virginia-based group isn't just working for the little guys. Many of America's largest store chains—including Wal-Mart, Target, Best Buy Co. (NYSE: BBY - News), Home Depot Inc. (NYSE: HD - News) and Sears Holdings Corp. (NYSE: SHLD - News)—are involved in the campaign, lobbying legislators and increasingly taking public swipes at Amazon.

"The rules today don't allow brick-and-mortar retailers to compete evenly with online retailers, and that needs to be addressed," said Raul Vazquez, Wal-Mart's executive vice president of global e-commerce.

Amazon has feverishly fought efforts to compel it to collect sales taxes. The Seattle-based online retailer says it complies with the law. Under a 1992 U.S. Supreme Court ruling, only merchants who have a physical presence, such as stores, in a state have to collect sales taxes. Amazon currently gathers those taxes in just five states: Kansas, Kentucky, North Dakota, its home base of Washington, and New York.

But retailers pushed for passage of a new law in Illinois last week that forces Amazon to collect sales taxes if it employs marketing affiliates in the state—a measure similar to a New York law that retailers want to replicate nationally—and their drumbeat may soon spur federal action.

U.S. Sens. Richard Durbin, an Illinois Democrat, and Mike Enzi, a Wyoming Republican, are considering more direct legislation to force online retailers to collect sales taxes, people familiar with the matter said.

[More from WSJ.com: Amazon Severing Relationships with Illinois Affiliates]

Amazon contends store chains are pushing the laws to siphon away its valuable business partners. "These new tax laws affecting affiliates are supported by the large national retailing chains that covet the affiliate advertising programs of their competitors," Paul Misener, Amazon's vice president of public policy, said in a statement. Amazon's affiliates include blogs and other websites that direct shoppers to Amazon's online store, and collect commissions for sales.

Store chains have been complaining for years that online merchants should collect and remit sales taxes.

But retailers are pressing for change with greater vigor this year, given that the recession accelerated a consumer shift to Internet purchases. And with many states facing big budget shortfalls, politicians are eager to increase revenue without raising taxes. Prodding online retailers to collect the money isn't a new levy, proponents argue, since most consumers are already supposed to pay state use taxes on purchases from online-only merchants.

"We're seeing an increased urgency from states trying to make up for lost revenue," said Laura Bishop, Best Buy's senior director of government relations.

The Alliance for Main Street Fairness was formed last spring. Danny Diaz, a member of Washington political-consulting firm FP1 Strategies, who acts as the Alliance's spokesman, declined to disclose whether the majority of its funding came from large retailers.

"It's fair to say that both large and small businesses are active" in the campaign, he said.

[More from WSJ.com: Walmart's Pitch for Amazon Affiliates]

Hours after Illinois Gov. Pat Quinn, a Democrat, signed the Internet sales-tax law last week, Amazon cut ties with its roughly 9,000 Illinois affiliates to avoid collection there. Amazon took similar actions in Hawaii, North Carolina and Rhode Island after those states passed legislation similar to the New York law, which Amazon is challenging in court.

Wal-Mart, Sears and other store chains publicly offered to work with the Amazon affiliates. A group representing the affiliates estimates they paid $18 million to Illinois in the form of income taxes, and are likely to see that amount drop by 25% to 30% this year.

Targeting affiliates is just one of the tactics retailers are supporting to pressure Amazon.

In states including Texas and Arkansas, store chains are also backing legislation that seeks to make clear that Amazon must collect sales taxes if it controls in-state warehouses through related companies.

Amazon last month said it would close a Texas distribution center amid a tax dispute with Republican State Comptroller Susan Combs, who contends that Amazon owes $269 million in uncollected sales tax because of the facility's physical presence in the state.

Texas is facing a projected $4.3 billion deficit this fiscal year.

"In Texas we rely heavily on sales taxes, and if we don't protect ourselves from companies creatively structuring themselves to avoid tax collection, we're going to lose a lot of revenue," said the author of the Texas bill, Republican Rep. John Otto.

In California, which faces a $26.6 billion shortfall, only 1% of consumers pay use tax by voluntarily reporting online purchases on tax forms, and $1.1 billion goes uncollected, according to the state's legislative analyst.

"Amazon is choosing to be a bully" by dropping affiliates instead of collecting taxes, said California Assemblywoman Nancy Skinner, a Democrat who is carrying legislation supported by Wal-Mart and other retail chains, similar to what became law in New York and Illinois.

She said her aim is "to help California's revenue... and to create a level playing field for our businesses."

Write to Miguel Bustillo at miguel.bustillo@wsj.com and Stu Woo at Stu.Woo@wsj.com

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