Commerce: Amazon Exemption Won’t Cost State Tax Revenue

July 13, 2011

Investigative Reports

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The NerveThe state sales tax exemption granted to Internet retail giant Amazon.com will not result in any loss of tax revenue to South Carolina, if you ask the S.C. Department of Commerce.

The Nerve last week reported that a revised cost-benefit analysis of the incentives deal to bring an Amazon distribution center to Lexington County didn’t include any projections about the loss of state sales tax dollars with the exemption, which was granted under a just-enacted state law.

Other media reports have pegged the initial yearly revenue loss with the exemption at $2.5 million.

Even without those projection figures, the revised analysis released to The Nerve by Commerce under the S.C. Freedom of Information Act estimates that the incentives deal will cost S.C. taxpayers nearly $61 million over 10 years, approximately $21.5 million more than originally projected.

The estimated public costs include more than $41 million in various tax credits and rebates, at least $11 million in increased state and local education costs, and $6 million in special training costs for Amazon workers.

Neither Commerce Secretary Bobby Hitt nor other agency officials initially responded to written questions from The Nerve for the July 5 story.

Typically, Commerce does not reply to verbal or written questions posed by The Nerve; the agency’s usual practice has been to respond only to Freedom of Information Act requests for records.

But the department broke with its practice and answered several questions for the July 5 story, though its responses were done two days after the story was published. In its July 7 letter to The Nerve, Karen Manning, the agency’s chief attorney, said she was responding on behalf of Hitt.

Asked why the revised analysis didn’t include projections about the loss of state sales tax revenue with the exemption, Manning replied: “There is no loss of sales tax revenue from the safe harbor legislation because the federal government does not require a company without nexus (i.e., a company not making sales in, or directing sales to, a state) to collect sales tax in that state.”

“As has been widely publicized,” Manning continued, “individual taxpayers are obligated under state law to pay use tax on out-of-state purchases. Location of a distribution center in South Carolina does not change this obligation and only increases general fund dollars by putting more money in the pockets of individuals that are unemployed or underemployed.”

Critics, however, have contended that the Amazon exemption would hurt certain existing South Carolina businesses that have to collect state sales tax. A group representing businesses, including retail giant Wal-Mart, waged a high-profile, but ultimately unsuccessful battle in the S.C. General Assembly this year to kill the exemption.

In the July 5 story, The Nerve reported that according to a model cost-benefit analysis developed 15 years ago by the S.C. Board of Economic Advisors (BEA), any projected “detrimental effect on existing businesses” must be included in an analysis.

The initial and revised analyses for the Amazon project were prepared by Commerce on behalf of the state Coordinating Council for Economic Development (CCED), made up of the heads of state agencies involved in economic development, including Commerce, which provides staff support for the group. Under state law, the Commerce secretary chairs the 11-member council.

Gov. Nikki Haley said she was opposed in principle to the Amazon exemption, but let it become law on June 8 without her signature, contending that the previous administration had promised the tax break.  The law exempts Amazon from collecting state sales taxes on purchases made by S.C. residents until Jan. 1, 2016.

Besides the sales tax-exemption issue, Manning also responded in the July 7 letter to several other questions from The Nerve relating to the Amazon deal.

Manning confirmed that the cost-benefit analysis didn’t include the projected loss of local property taxes under a fee-in-lieu-of-taxes (FILOT) agreement with Lexington County. In the July 5 story, The Nervereported, citing the initial analysis, that Amazon would pay $1.7 million in FILOT fees in the first year, compared to a $3.8 million bill, as estimated by The Nerve, if the completed project were assessed at the regular industrial property rate.

“As your president, Ashley Landess, correctly points out in today’s The State,” Manning said, “our state has the highest property tax rates in the nation for manufacturing. This is exactly why local governments offer fee-in-lieu-of-taxes agreements to companies considering investments in South Carolina.”

(Landess is president of the South Carolina Policy Council, the parent organization of The Nerve.)

“Without the ability through FILOT to make our state more competitive with regard to property tax rates,” Manning continued, “revenues generated by new investment would be zero because companies would choose to locate elsewhere. Property tax revenue at a rate more consistent with our competitor states is certainly better than no revenue at all.”

In another matter, asked why the projected capital investment by Amazon listed on the BEA model form was far below announced investment levels, Manning replied: “This was a mistake. The capital investment numbers reflected in the cost-benefit analysis should have been consistent with announced investment levels.”

As the battle in the Legislature escalated over the sales tax exemption, Seattle-based Amazon announced that it would up its job-creation target to 2,000 employees from 1,249 and its capital investment to $125 million from $100 million.

A BEA form for the project listed total direct and indirect income benefits from the capital investment at $85.6 million.

Lindsey Kremlick, spokeswoman for the S.C. Budget and Control Board, which oversees the BEA, earlier told The Nerve that Commerce used data supplied by Amazon for the cost-benefit analysis.

Reach Brundrett at (803) 254-4411 or rick@thenerve.org.