The bones of a bad deal

The bones of a bad deal

April 27th, 2011 in Opinion Times

Like hastily hidden bones, the secret Amazon sales-tax deal just keeps coming up. It seemed settled and buried, again, last week when Gov. Bill Haslam, citing discussions with former Gov. Phil Bredesen, said he had agreed not to require the giant Internet retailer to collect sales taxes on sales in Tennessee routed through its two new plants in Hamilton and Bradley counties.

But on Monday, Lt. Gov. Ron Ramsey, apparently miffed that he has not yet been able to get the details from former Economic Development Commissioner Matt Kisber, said that he still wants to know the rationale for the agreement and how it was reached.

A harmful precedent

He's not the only one. Brick-and-mortar retailers also reasonably want to know the rationale for exempting Amazon from collecting sales taxes. Tennesseans generally should want to know as well. It sets a bad precedent, and there's much more than tax revenue at stake to let it go by so quietly.

The controversial status of Amazon and other similar Internet retailers owes to conflicts over interpretation of a 1992 U.S. Supreme Court decision. That decision relieved Internet-based retailers of the responsibility to collect state sales taxes if they have no physical "nexus" in a state.

If they do have a building in a state, however, that would seem to many to constitute a nexus. Yet states' views, or Amazon's economic clout, apparently generate diversity on that interpretation. The company has facilities in 19 states, but collects state sales taxes in just five.

New York state went to court to force Amazon to collect its state sales taxes. But Amazon has stiffed others, and kept its sweetheart tax status. Last fall it balked at Texas' demand to begin collecting that state's sales taxes, threatening to shut down two distribution centers and fire its work force in Texas if the state insisted on sales tax collections. But more recent reports show Amazon staying, and negotiations continuing.

A virtual store

Amazon officials contend the facilities it is building here are just distribution centers - essentially warehouses where items are just received and shipped out - though apparently to individual customers. As distribution centers, the company argues, it's not obligated to collect sales taxes. And if it is, the inference assumed in Nashville is that Amazon would pack up and leave rather quickly, giving Tennessee a black eye in economic development just when new companies are eyeing the state again.

Indeed, that's apparently the basis on which Bredesen quietly decided to let Amazon off the hook for collecting sales taxes if it would build in Tennessee, according to Haslam's recall of his conversation with his predecessor.

"He said, 'Well, in my book, they [Amazon] can either build there in Chattanooga or they can go nine miles away in Georgia and build and do the same thing,'" Haslam recalled Bredesen as saying.

That may be the long and short of it. It's unwise and unfair nonetheless. State Rep. Kevin Brooks, R-Cleveland, framed the issue the way Cleveland, home of one of Amazon's two new plants, clearly would want to see it. "This deal is done," he told Times reporter Andy Sher.

"We're going to turn into South Carolina or Texas if we're not careful," he said, referring to other states' squabbles with Amazon over sales tax collections. "There are hundreds of jobs, hundreds of millions of dollars in economic development - and the deal is done."

Capsuling Amazon's argument more narrowly, he asked "what we could tax at the Amazon warehouse. It's not a Wal-Mart. It's not a Sam's. It's not a Costco. This is a distribution center where little boxes come in one end and big boxes go out the other. And there is no cash register. There is no point of sale."

That argument shallowly misstates the virtual world of retail sales, where the "point of sale" is at the end of a computer transaction in a business that simply skips over traditional sales models and retail centers and thus skims a higher profit.

In fact, brick-and-mortar (B&M) businesses buy products from many of the same wholesalers that virtual retailers use. The B&M retailers receive shipments of boxes of goods from around the country and the globe, just as their virtual counterparts. The only difference is how they conduct their sales transactions - at a walk-in store, or online.

Equity plus local value

The B&M business model is clearly more valuable to a community. Brick and mortar stores collect and remit local sales taxes, as well as pay local property taxes that further support civic infrastructure. Online stores should do the same. Given the tax abatement deals given to Amazon as an incentive to lure them here for their warehouse jobs - incentives which further distort the equity equation against B&M stores - the company should be more than willing to collect state and local sales taxes for sales to Tennesseans.

Exempting online retailers from that responsibility robs the state of needed revenue and gives them a vast and unfair price advantage over their B&M retail counterparts. It also creates a dynamic which ultimately undermines the fiscal health and staying power of B&M retailers, and their longer-term commercial value to their host communities.

Check the trend

The problem and long-term economic damage with states' tolerating this two-tier, two-faced economic paradigm for B&M and online retailers can be predicted and calculated, in ways that the U.S. Supreme Court failed to conceive in 1992. On all counts, it is wrong on its face, and it entrenches an unfair and rapidly growing national trend that just worsens the hollowing out of retail jobs and businesses.

Congress, as Sen. Bob Corker said here last week, has no interest in correcting the negative dynamic through a national sales tax agreement. It more easily accedes, as well, to the rapidly expanding clout of the rich online lobby.

States need to jointly take charge of the equity issue for their commercial tax for retailers. If they don't, they will soon be kicking at the bones of dead brick-and-mortar business, and the hulking ghosts of empty malls once inhabited by shoppers spending sales-taxed dollars. Lt. Gov. Ramsey should have a bone to pick with this future if Haslam doesn't.