Subsidy deals normally involve reductions in a company’s tax bill, but Amazon recently abandoned a distribution center project in South Carolina because the state decided not to make it easier for the online retailer’s customers to avoid paying sales taxes on their purchases.
The complicated dispute began last year, when the previous administration of Gov. Mark Sanford offered Amazon a five-year exemption from the obligation to collect sales taxes on purchases made by South Carolina residents. In recent months, both the new governor, Nikki Haley, and growing numbers of legislators criticized the plan, leading to a lopsided vote against the exemption in the South Carolina House last week.
For an online company such as Amazon, the ability not to collect taxes is worth a lot more than conventional “incentives.” It provides a competitive advantage over brick-and-mortar stores that have to tack on the additional amount to a customer’s bill, making their prices seem higher. Big retail corporations such as Wal-Mart, Target and Best Buy have lined up against Amazon by supporting organizations such as Alliance for Main Street Fairness that represent small business.
Note: The fact that Amazon declines to collect the taxes does not mean the transactions themselves are exempt. Customers are supposed to voluntarily submit the appropriate amount to state authorities but rarely do so.
The issue extends far beyond South Carolina. Amazon has been battling with states around the country over sales tax issues. In states where Amazon does not have a physical presence such as a distribution center or a store (the technical term is nexus), the company relies on a 1992 U.S. Supreme Court ruling to justify its refusal to collect sales tax. In states where the company has such a presence, Amazon has been seeking to get exemptions from its collection obligation.
Some states are fighting back. The Institute on Taxation and Economic Policy notes in a brief that public officials in many states, with the support of traditional retailers, are beginning to pass laws requiring that online retailers like Amazon collect sales tax even when there is no nexus. Some states have expanded the definition of a “physical presence” to include affiliates (for example, a business that has an Amazon advertisement on its website and gets a commission when a client clicks on the ad). Amazon tries to combat these laws. After New York passed its legislation, Amazon unsuccessfully tried to challenge it in court. The company also has threatened to cut relations with its affiliates, as it did in Texas and plans to do in Illinois.
The South Carolina sales tax exemption was unusual because it had been offered to the company as a part of a bigger subsidy package which included an obligation to create 1,249 full time jobs (with health benefits) and 2,500 temporary positions by 2013. The promised deal had to be approved by the state legislature. After the last election, the subsidy lost the support of many of the state’s Republicans, especially Tea Party-supported legislators who focused on tax cuts for all businesses. They also wanted a public review of subsidy deals. Governor Nikki Haley said she would not have promised a deal such as this one, but if the legislature passed the Amazon bill, she would not veto it. Some Senators said the state had to keep its word, and the sales tax exemption bill passed the Senate Finance Committee. But the House killed the deal by a vote of 71 to 47.
Although focused on sales tax collection issues, Amazon has taken traditional subsidies in other states. In Tennessee, to encourage Amazon to build two distribution centers and create 1,400 jobs by the end of 2011, the state offered the company, in addition to a sales tax exemption, free land, job-training support, and $12 million in property tax breaks. In 1999, the company received millions of dollars in free land, tax breaks, and job training programs from Kansas, Kentucky and Georgia. Additionally, in Kentucky, the company was allowed to keep 4 percent of withholding taxes on each employee paycheck.
South Carolina deserves some credit for standing up to Amazon, but the state’s economic development practices still need a lot of improvement. The state fared poorly in Good Jobs First’s 2010 rankings of states’ subsidy transparency due to its lack of online recipient reporting for any of its major economic development programs. Hopefully the Amazon conflict will prompt the state to adopt accountability reforms. If nothing else, the Amazon episode shows that no deals between public officials and private companies should be made behind closed doors, without public debate, and should be offered only when truly needed.