Thursday, December 29, 2011

Down the Amazon Revenue Stream

Here in the Commonwealth of Virginia, our governor just announced that Amazon would be building two distribution centers in the state. As part of the deal, Amazon wouldn't be paying Virginia sales tax -- and various groups started to protest.

Now sorting out all the cross-currents here can be tricky. According to a recent article in the Free-Lance Star, the push is to get Amazon to collect sales taxes on purchases made by Virginia residents, since the company would have a presence in the state.

In the brick-and-morter world, that makes sense. If you have a store in the state, then any transaction in the building happens in the state and therefore the appropriate taxes should go to the state. But, according to a 2007 ruling by the state tax commissioner :
The establishment of a Virginia Distribution Center would not, by itself, create corporate income tax nexus or retail sales and use tax nexus for the Retailer.
So there's precedent for Amazon to be exempt from the ruling. But there's another factor here that no one seems to be talking about. And that's the nature of the affiliates. While Amazon is a retail company that does sell directly, it also serves as a gateway for affiliates to bring their own goods to the marketplace that Amazon has created.

Amazon takes a fee for acting as the middleman, but the transaction is really between the affiliate and the customer. I recently purchased a second-hand book through Amazon. The seller was a used book store in Kansas.

At the moment, neither the book store nor Amazon have a physical presence in the state, so there was no sales tax to collect. But what about next year? While the Amazon distribution center may be located in Virginia, the book store is in Kansas, That's really where the transaction takes place. So should the Kansas book store be collecting Virginia sales tax?

Some might say Amazon should collect that as the money passes through its system, because it is located in Virginia. But maybe not. Some affiliates (such as our own little company DCD Records) doesn't keep their inventory with Amazon, or even use Amazon's shipping services.

So what if that Kansas book store received notification of the sale, pulled the book off its shelf, wrapped it, took it to the post office and sent it on its way? Should that matter?

And remember -- the reverse could be true as well. DCD Records has sold recordings all over the country and never collected any sales tax on behalf of any other state. Should we? It would be an accounting nightmare that's for sure.

We do collect sales tax on purchases by Virginia customers. Because there's no mechanism for adding sales tax, when we sell to a Virginia resident, we have to take the sales tax out of the amount we collect -- so we make less money on a product when we sell it in state than when we do outside of it.

An unintended consequence, I'm sure.

And something else: if Amazon is required to collect Virginia sales tax, and DCD Records has to collect Virginia sales tax, then every disc we sell in state will be taxed twice.

And who thinks that is a good idea?

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