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Amazon offers to serve as tax collector — for a price

The Internet retailer, which had battled state efforts to get taxes from customers, says it will do so for third-party merchants that sell items on its website for 2.9% of the tax collected.

November 03, 2011|By Marc Lifsher, Los Angeles Times
  • Workers move merchandise at the fulfillment center in Phoenix.
Workers move merchandise at the fulfillment center in Phoenix. (Joshua Lott, Bloomberg )

Reporting from Sacramento — Inc. for years has fought state efforts to force it to collect sales taxes from its customers. Now, instead of battling the tax man, the company is looking to profit — by hiring itself out as an Internet tax collector.

In an abrupt about-face, the company is now offering to handle sales-tax chores for merchants who sell products through its site for a fee equivalent to 2.9% of the taxes collected.

The optional service, which is set to roll out Feb. 1, will be offered to Amazon's third-party vendors in all 50 states. It's a strategy that could reap millions of dollars in new revenue for Amazon, which has been among the most vocal opponents of government attempts to tax e-commerce.

Analysts said Amazon's shift is an acknowledgment that Internet retailers ultimately will have to play by the same rules as bricks-and-mortar stores. It's also a recognition that there's money to be made in the process, said George Runner, a member of the California State Board of Equalization, the agency that administers sales tax.

"This is what smart businesspeople do," Runner said. "They are going to use whatever model they can to expand their business opportunities. They're very slick at it."

Seattle-based Amazon currently collects sales taxes from its own customers in Washington, New York, Kentucky, Kansas and North Dakota, as well as in some foreign countries where it does business. In the U.S., Amazon and other online merchants have long contended that they're legally obligated to collect sales taxes only in states where they have a physical presence.

But the rise of Internet commerce has made it a plum target for wider taxation. U.S. Internet retail sales topped $176 billion last year and are expected to reach $279 billion by 2015, according to Forrester Research Inc. Online sales currently account for about 9% of total retail sales, a share that's projected to triple over the next few decades. State and local governments are determined to force Amazon and others to pay up.

"The reality is … that they are going to be collecting sales tax," said Benjamin Schachter a senior analyst for Internet and interactive entertainment stocks for Macquarie Capital (USA) Inc., a New York investment bank.

In California, Amazon recently abandoned a much-criticized effort to repeal a new Internet sales tax law passed by the state legislature this year. Instead, the company cut a deal with the administration of Gov. Jerry Brown to start collecting and remitting California's 7.25% sales tax, plus local sales taxes, beginning Sept. 15., 2012.

That agreement was a victory for traditional retailers, who say they've lost billions in sales to Internet merchants that sell identical merchandise free of sales taxes. But news that Amazon now is angling to make a buck from those levies has some fuming anew. Wal-Mart Stores Inc., Target Corp. and major chains continue to push legislators to close legal loopholes that allow Amazon to dodge sales-tax collection in most U.S. states.

"It's hypocrisy of the highest order," said Jason Brewer, a spokesman for the Retail Industry Leaders Assn. in Arlington, Va. "Now, they're trying to profit from collecting sales tax everywhere else, while still digging in their heels from collecting for their own company."

Amazon's new offer is aimed at hundreds of thousands of independent U.S. businesses, ranging in size from tiny used-book sellers to major manufacturers, that sell their products through the site. Amazon works with about 2 million such sellers worldwide but won't specify how many of those are based in the U.S.

Nearly 40% of the merchandise sold worldwide by Amazon comes from third parties that use the company's Internet platform to do business, Macquarie analyst Schachter said. Amazon last year posted net sales of $34.2 billion. About half of those sales required Amazon to collect sales taxes or value-added taxes from U.S. and foreign buyers, Schachter said.

Amazon, like other e-commerce retailers, earns commissions and fees for sales made by third-party sellers that use its site. But the company's move to charge its affiliates extra for collecting sales taxes may be an industry first.

Wal-Mart, for example, does not charge for collecting sales taxes for the independent vendors that sell through its online store, Wal-Mart spokesman Daniel Morales said. Neither does Best Buy Co., whose website is also open to third-party sellers. E-Bay Inc. provides its sellers some online tools for calculating state and local sales taxes but leaves collecting and remitting those levies to them.

Last week, Amazon told merchants that sell their wares through Amazon's Marketplace Professional and Webstore programs that they were eligible to take advantage of the service. Amazon said it would calculate and collect the taxes, then send those funds back to the affiliate sellers, who would remain responsible for remitting them to state tax agencies.

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