Virginia's bricks-and-mortar retailers are looking toward the Lone Star State as one model in their push to make Amazon.com Inc. charge sales taxes once the online retail giant opens two huge distribution centers in the state.
By not collecting the sales taxes from Virginia residents, the state is missing out on millions of dollars in tax revenue, the retailers claim.
Amazon already has distribution operations in Northern Virginia, and now traditional retailers believe that the company's plans to open two distribution centers in Chesterfield and Dinwiddie counties this year only bolsters the argument that its physical presence in the state is clear — and it should collect sales taxes from Virginia residents.
As a debate rages nationwide over whether and how growing online sales should be taxed, Virginians might look to what state lawmakers in Texas did last year aimed at forcing Amazon to remit the sales taxes the company has managed to avoid collecting in most states for years.
Texas lawmakers approved legislation that defined Amazon's distribution center in Fort Worth as establishing a "physical nexus" in Texas, thereby obligating the Seattle-based company to collect the tax on sales to Texas residents.
Several trade groups for retail businesses in the state are pushing legislation that will seek to change the tax code and look at the "nexus issue, or physical presence of a company," said George Peyton, vice president for government relations for the Virginia Retail Federation, the lobbying arm of the local Retail Merchants Association and the Retail Alliance in Hampton Roads.
If an online business has a physical presence in Virginia, "then in fairness to all the others who also have a physical presence in the state, you should collect the tax on purchases made by Virginia consumers," he said.
If the retail groups are successful and Amazon is required to remit sales taxes in Virginia, it's unclear how much revenue that would produce. But it would likely be millions, they say.
When Indiana last week reached an agreement with Amazon to start collecting sales taxes in 2014, state officials there estimated it would bring in at least $20 million more in annual sales-tax revenue. Gov. Mitch Daniels' office said Indiana is the fourth state to reach such a tax-collection agreement with Amazon.
States have been pushing harder to get sales taxes from Internet-based merchants as online sales have grown.
Researchers at the University of Tennessee projected in 2009 that state and local governments nationwide would lose about $11.4 billion in revenue from uncollected taxes from online sales by 2012.
The study estimated Virginia's lost revenue in 2012 would be $207 million. Those estimates are for all online sales for which taxes are not collected, not just Amazon sales.
In 2010, Virginia residents and businesses voluntarily paid $44.5 million in taxes on their tax returns for purchases they made — often online or from a catalog — but were not charged a sales tax for, according to the Virginia Department of Taxation.
Amazon has clashed with several states over the collection of sales taxes for online purchases.
However, Amazon recently agreed to start collecting sales taxes in California in 2012.
And last month, the company finalized plans to expand its operations in Tennessee after reaching an agreement with the state to start paying sales taxes in 2014.
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The issue of collecting sales taxes on purchases from out-of-state retailers is a legally complex one.
A 1992 U.S. Supreme Court decision held that retailers are exempt from remitting sales taxes in states where they have no "nexus," or physical presence such as a store, office or warehouse.
The court ruled that requiring remote sellers to comply with sales taxes in every jurisdiction would be too burdensome under the commerce clause of the U.S. Constitution.
However, the court noted that Congress could enact legislation that would require all sellers to remit state sales taxes.
Amazon has said it supports federal legislation that would do that, and the company charges sales taxes on purchases made in its home state of Washington and in other states where it has sales operations such as Kansas and Kentucky.
However, the company has gone to great lengths to avoid charging the tax to consumers in most states, even those where it has distribution centers.
Amazon did not respond to a request for comment.
In Virginia and other states such as Texas, Amazon has used a legal tactic known as "entity isolation," in which its operations are run by a separate business entity named Amazon.com.KYDC LLC.
Amazon.com.KYDC LLC has been registered with the State Corporation Commission in Virginia since February 2009. The company listed its jurisdiction of formation as Delaware and its principal office as Lexington, Ky.
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Gov. Bob McDonnell's office has said Amazon does not have to collect and remit sales taxes in Virginia, citing a 2007 state tax department ruling that such an entity was exempt.
The tax ruling did note, however, that it assumed the distribution centers run by the company "are not subsidiaries of the retailer."
It is a situation that some traditional retailers describe not only as unfair but also as bizarre.
"It confirms the most cynical conspiracy theories about the tax code, which are that it is written by the few for the benefit of the well-connected," said Albert Pollard, a former state legislator who owns a business in Lively that makes and sells portable sawmills.
Pollard said most of his sales are made online and mostly to out-of-state customers.
He sees no real difference between his operation and the distribution Amazon is planning, but when he started his business in 2008, "I was informed by my accountant in no uncertain terms that I needed to remit the state sales tax" on sales made to Virginia residents.
"Amazon has its big warehouses with 1,300 workers, and I have my tiny little warehouse with two employees," he said. "The only reason Amazon gets the break is because they are big."
At Saxon Shoes, a bricks-and-mortar shoe seller with stores in Henrico County and Fredericksburg, company president Gary Weiner says he does not blame Amazon for seeking an advantage, but he has a problem with the way politicians seem to have been complicit.
"I am in no way, shape or form into doing away with Amazon," he said. "I just want a format that makes it fair and even for business people to compete."
Yet the way it works under the current interpretation of the tax code, Amazon can offer a 5 percent discount to shoppers off the bat by not charging the state tax, Weiner said.
"How does the governor expect local business owners to compete with a giant like Amazon, who can essentially offer my neighbors a 5 percent discount over what I can sell for any day?" he said. "How does he expect us to compete on that turf?"
Andy Thornton, co-owner of the furniture store LaDifference in downtown Richmond, said it is "disingenuous" to say that while Amazon has distribution centers in the state, it does not have to pay sales taxes because the centers do not actually make sales.
"I admire Amazon tremendously, but why wouldn't they pay sales tax if every brick-and-mortar store in the state has to pay?" he said. "It is the brick-and-mortar stores who support the communities, who provide the philanthropic donations and pay for the infrastructure."
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Retail groups say they are fighting a perception that making Amazon charge sales taxes would be imposing a new tax.
"It is not a new tax," said Peyton of the Virginia Retail Federation. "It has been on the books now for over 40 years."
That's because in Virginia, the buyer is required by law to pay the state sales tax on online purchases if the seller does not charge it. Consumers are supposed to include those payments with their annual income tax.
The perception that requiring online retailers to collect and remit sales taxes would be a new tax may be one reason that federal legislation has moved at "a snail's pace," said Ray Mattes III, president and CEO of the Retail Alliance in Hampton Roads.
"I think that there are some politicians who think that it is a new tax," Mattes said. "I don't think any politician today, especially in election years, wants to be viewed as pro tax. We are not advocating new taxes. We are just advocating a level playing field."
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