Amazon hurt by new tax rules in Tennessee, other states

photo Bins containing orders are rushed to packaging at the Amazon fulfillment center in Chattanooga.
photo Amazon

Adam Smith says he was a frequent buyer of items from - until this year.

Smith, a senior marketing publications specialist at Mueller Water Products in Chattanooga, says he is shopping elsewhere since Tennessee began imposing state and local taxes on Amazon sales in January, adding 9.25 percent to the cost of such purchases.

"I very rarely shop at Amazon anymore, whereas in the past I used it quite frequently, if not weekly," Smith said Tuesday. "No taxes plus free shipping [on most items] is what led me to Amazon. Now that I have to pay taxes, I choose to look elsewhere."

Smith is among a growing number of Amazon customers who are trimming their purchases from the world's biggest online retailer in favor of other online merchants not subject to state and local sales taxes.

Tennessee joined 19 other states this year in requiring Amazon to collect sales taxes on what it sells because the company operates distribution facilities in the state, including its giant warehouses in Chattanooga and Charleston, Tenn. Amazon will begin collecting sales taxes on items purchased by Florida residents on Thursday after the company expanded its facilities in the Sunshine State last year.

A new study suggests that requiring Amazon to collect the sales tax is likely to limit Amazon sales and push some buyers to other online merchants that don't have a presence in Tennessee and aren't required to collect sales taxes.

Researchers at Ohio State University looked at purchases by 245,000 people in five states that began permanent collection of taxes on Amazon purchases between 2012 and 2013 -- California, New Jersey, Pennsylvania, Texas and Virginia. The study found that the sales tax reduced Amazon sales overall by 9.5 percent. For purchases of $300 or more, Amazon sales plunged by 23.8 percent after the company began collecting the tax.

"Households substitute Amazon with other retailers, either online retailers who are exempt from collecting the sales tax or in-state retailers (online and brick-and-mortar)," doctoral student Brian Baugh wrote in the 39-page study.

While Amazon sales dropped, big-ticket sales of other online merchants who still don't have to collect sales taxes on their sales jumped by more than 60 percent. The study found that sales at local brick-and-mortar stores rose 6.5 percent on items valued at $300 or more.

Desha Grubb Maples said Tuesday she has quit buying from Amazon since the new tax began in January, in favor of other online merchants not required to collect the tax because they don't operate in Tennessee.

Despite such losses, however, still grew its sales by 20 percent in the first quarter of 2014. How did the online retailer do it?

Well, not everything Amazon peddles on the Amazon Marketplace website is covered by the new "Amazon tax."'s program permits third-party sellers to advertise their goods on its website -- and even to outsource the billing, warehousing and delivery to Amazon.

But because the items are not technically sold by Amazon, such items are not subject to requiring buyers to pay sales tax at the time of the purchase. As a result, Amazon still doesn't have to collect tax on much, if not most, of the sales it makes through its website.

Amazon continues to not only expand its own inventory of items for sale, but the Seattle-based Internet giant is selling more of other retailers' goods on its website for which it doesn't have to collect any sales tax if such businesses don't operate in the state where the purchase was made.

Dr. William Fox, the director of economic and business research at the University of Tennessee, thinks that difference is unfair. Fox, a leading expert on online sales, is hopeful that Congress will act to address the inequity.

The Supreme Court has ruled that retailers that don't operate in a state are not required to collect the sales taxes where they sell their goods. Those taxes are supposed to be paid by the individual, although few actually pay the tax if the retailer doesn't collect it at the point of purchase.

Fox and other economists project that the Amazon tax should generate about $30 million a year in extra revenue for Tennessee, including $15 million in the current fiscal year when the tax will be collected for only six months. But that is only a fraction of the estimated $400 million to $600 million of potential sales tax revenue for state and local governments in Tennessee if all online sales were collected by merchants and catalogs selling their goods from other states.

"From the beginning, we have argued that this is not about getting a small number of big firms collecting the tax," Fox said. "What we need is to broadly tax retail sales in the same way in every state."

Congress is considering the Marketplace Fairness Act that would enable all states to collect sales taxes on purchases made from out-of-state retailers, whether the companies operate in a state or not. The measure has been approved in the U.S. Senate, but it is still awaiting House action.

But even that measure won't capture all online sales since smaller merchants won't be subject to collecting sales taxes under the current version of the legislation.

State Sen. Randy McNally, R-Oak Ridge, chairman of the Senate Finance Committee, prefers that all retailers collect taxes on their sales to level the playing field.

"Unfortunately, we disadvantage those businesses that operate in our state and help our communities by paying franchise and excise taxes to the state and wages to local workers," he said.

McNally pushed for Amazon to begin collecting sales taxes two years ago, but, at the urging of Gov. Bill Haslam, agreed to defer the requirement until this year as an inducement for Amazon to build five distribution centers in Tennessee.

"That has worked out well for our state," McNally said.

Consumers are supposed to pay a use or sales tax on purchases they make online, but the seller is not required to collect the tax in advance. Amazon began sending notices to its customers last year telling them how much each individual bought in the past year and what sales tax was due for such purchases.

But with virtually no enforcement mechanism for requiring individuals to pay the use tax after their purchase, few individuals filled out the necessary forms and mailed their checks to the state to pay such taxes.

"We don't collect much in tax revenue from individuals voluntarily paying these sales taxes often months after they bought an item," McNally said. "We need a fairer and better system."

McNally said if all online sales taxes were properly collected, the state could afford to eliminate its Hall tax on income and may be able to cut other tax rates for individuals.

Contact staff writer Dave Flessner at or at 757-6340.

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