The world's biggest Internet retailer is proposing to open distribution centers in Hamilton and Bradley counties that could handle hundreds of millions of dollars of shipments a year.

But those sales won't necessarily generate any more sales taxes for Tennessee.

Unlike conventional brick-and-mortar retailers, Amazon doesn't collect taxes on most of its sales in Tennessee and 44 other states.

That could change in Tennessee if Amazon builds 1 million-square-foot warehouses in Chattanooga and Cleveland, Tenn. But it might not.

"We are having discussions right now with the state on this," said Fred Kiga, director of policy for Amazon. "The distribution centers here are not retailers, but rather drop shippers."

Amazon has resisted having to collect sales taxes in all but five of the states where it sells goods. That includes most of the 18 states where it operates fulfillment centers like those planned in Southeast Tennessee.

Nationwide, states lose $20 billion a year from Internet retailers that don't collect sales taxes for most of their goods -- Amazon, Overstock.com and CDW among them -- according to studies by the University of Tennessee's Center for Business and Economic Research.

Technically, consumers are supposed to pay sales taxes on all purchases, whether the merchant collects them or not. But UT economist Bill Fox, a national authority on Internet taxation, estimates that less than 2 percent of sales taxes due are paid if people are allowed to self-report and pay them after a purchase.

"This is not just a revenue question; it's important as an economic and fairness question to get this worked out," Fox said. "What we have today is an incentive for people to purchase goods out of state in a way that I don't think is in the best interests of our state's economy."

Advocates for conventional retailers and some state governments are moving to close what they claim is an unfair tax loophole for e-commerce. In Irving, Texas, where Amazon operates a distribution center, the state sent it a $269 million tax bill this summer for uncollected sales taxes on goods it sold in the state over the last four years.

Amazon is appealing the levy. The company insists its distribution center is owned by a separate entity and does not meet the legal definition of a "physical presence in the state" that would make it a taxing retailer.

Tax revenue vs. jobs?

With nearly 1,500 full-time and as many as 2,200 more part-time jobs planned for Amazon's proposed local distribution facilities, Tennessee may be cautious about getting too tough over taxes.

A ruling that Amazon's facilities constitute a physical presence under Tennessee's revenue definitions could mean the state would require Amazon to collect millions of dollars of sales taxes on Tennessee purchases. Tennessee consumers could be required to pay when they order online.

Amazon must collect sales taxes in some states where it has distribution warehouses, such as Kentucky and Kansas, but not in most others with warehouses, such as Indiana, Virginia and Nevada.

The Tennessee Department of Revenue and the state Department of Economic and Community Development are working together to recruit Amazon. Officials with both departments declined to discuss whether Amazon would have to collect state and local sales taxes in Tennessee if the proposed facilities are built.

Revenue Department spokeswoman Sara Jo Houghland said both offices "worked closely to develop and implement" tax and other incentives for businesses to locate in the state. But she said the state doesn't discuss taxes on any individual business.

"Tennessee's approach has been highly successful, attracting more than 190,000 new jobs and $33 billion in new capital investment over the past eight years," she said.

Michael Mazerov, a senior fellow at the Center on Budget and Policy Priorities in Washington, D.C., cautioned states against granting sales tax breaks to Amazon or other companies just to lure them to a state.

"Clearly in the case of Tennessee, which is so reliant upon sales tax revenue, giving [required sales tax collections by an online retailer] away for the warehouse jobs you get in a distribution warehouse is not a very good tradeoff," Mazerov said.

Gov.-elect Bill Haslam said last week that untaxed online sales are a growing problem for states such as Tennessee.

"I do think this is something we need to look at long term, but I do not think it needs to interfere with our recruiting of Amazon to Tennessee," he said. "That's a huge priority for us."

Defining a retailer

The U.S. Supreme Court ruled in 1992 that retailers don't have to collect sales taxes in states where they have no physical presence, such as a store, office or warehouse. The legal term for this physical presence is "nexus."

The high court and online retailer advocates argue that requiring a company to comply with the varied rules and regulations of more than 7,500 local taxing jurisdictions would burden interstate commerce.

"Each of those jurisdictions applies the tax and determines who should be taxed differently," said Jerry Cerasale, a senior vice president of government affairs for the Direct Marketing Association, which represents catalog and online retailers. "It is so complex, and getting more complex all the time with tax-free holidays and other changes."

Streamlining taxes

To help standardize the definitions and rules for sales tax collections, the National Governor's Association and the National Association of State Legislators created the Streamlined Sales Tax Board in 1999.

In January, Georgia will become the 24th state to join the board.

Scott Peterson, executive director for the Nashville-based Streamlined Sales Tax Board Inc., said the group has helped bring more uniformity to sales tax rules. That allows software vendors easily to apply sales tax rates for any purchase.

The group is pushing Congress to adopt the Main Street Fairness Act to require online retailers to collect sales taxes for any states that adopt the streamlined standards.

Such legislation has yet to get out of committee in Congress, but Peterson said he remains hopeful.

"This is a states' right issue and gives Congress the opportunity to help states to manage their own affairs," Peterson said.

But Cerasale said the recommendations of the Streamlined Sales Tax Board "are streamlined in name only" and still too complex for many online retailers.

"This is not a question of whether taxes are owed on the sales," Cerasale said. "It's a question of whether a company should be forced to collect taxes in another state when it doesn't have any presence or voice in that state."

States get tough

Some states aren't waiting for Congress or the Streamlined Tax Board to act. New rules known as "Amazon laws" in New York, Rhode Island and North Carolina require online retailers to collect state sales taxes on purchases.

The National Retail Federation, which represents the nation's biggest shopping centers and conventional retailers, is urging legislatures and Congress to treat online retailers the same as brick-and-mortar stores.

"The merchandise sold online is no different than what is sold in a store," said Maureen Riehl, spokeswoman for the National Retail Federation. "There is no reason one group of merchants should be given an unfair price advantage over another."

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