Texas tells Amazon: Don't mess with us on taxes

Texas is investigating Amazon.com to see whether the online retailer may owe four years of back sales tax for purchases made by customers in the state, but Amazon claims it has fully complied with the law.

At issue is a distribution facility located in Irving, Texas that the retailer has operated since 2006. Before 2006, Amazon utilized a third party to fulfill orders in the state. The Texas Comptroller's Office is looking into whether the Irving location means Amazon has a physical presence in the state.

Although most Internet-based stores are exempt from collecting sales tax from customers, they must do so if they have a physical presence in the state. Amazon current charges sales tax for items shipped to Kansas, Kentucky, North Dakota and its home state of Washington.

But Amazon claims that it has abided by Texas laws, even if through a loophole. The retailer says the Irving facility is actually operated by Amazon.com.kydc, Inc., which is based out of Kentucky, and not Amazon itself. Under Texas law, a subsidiary is not required to collect sales tax.

The confuse may lie in records filed with the state. Amazon.com is listed as the owner of the distribution center in 2006 and 2007, not the "kydc" subsidiary. If the state's records are correct, Amazon could be liable for millions of dollars in back taxes. The Texas Comptroller's Office said it could seek four years worth of sales tax, which is 6.25% in the state.

Texas isn't the only state with which Amazon is having sales tax problems. New York recently enacted a law requiring all out-of-state retailers to collect sales tax based on advertising. Because Amazon lets New York-based affiliates to advertise Amazon's products and take a cut of sales, it would be liable to pay the tax.

Amazon sued New York earlier this month, challenging the constitutionality of this provision. Still, the company will begin charging between 8% and 9% in tax to New York-bound orders beginning June 1.

Although customers will be footing the bill, Amazon realizes that much of its appeal is that it can offer lower prices, especially in states like New York with high sales tax rates. If other states follow New York's lead in order to bring in more tax dollars, Amazon could see its customers buying from local brick-and-mortar retailers instead.

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