The Amazon.com Saga: Heading to Court?

April 19, 2011

Investigative Reports

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The NerveThe battle over whether Amazon.com should be exempt from collecting sales taxes from South Carolinians could wind up in court if a bill introduced last week becomes law, says a leading S.C. tax attorney.

Businesses opposed to the bill (S. 808) could contend in a lawsuit that granting the nation’s largest Internet retailer the exemption would violate their equal protection rights under the state and federal constitutions, said Mt. Pleasant attorney George “Gem” McDowell.

The Senate Finance Committee this afternoon is expected to take up the bill, sponsored by Sen. Nikki Setzler, D-Lexington.

In an interview Friday with The Nerve, McDowell, the current chairman of the S.C. Bar’s Tax Law Section Council, said a 1993 ruling by the S.C. Supreme Court (Geoffrey Inc. v. S.C. Tax Commission) greatly expanded the definition of a “nexus,” a decision which he noted was adopted by other states.

Setzler’s bill would exempt Amazon, which is building a 1-million-square-foot retail distribution center near Cayce, from being designated as a “nexus,” or having a physical presence in the state, until Jan. 1, 2016, for the purposes of collecting sales taxes. Under the bill, the sales tax break could end sooner if a federal law was passed overriding state law, or if Amazon didn’t live up to its end of the deal as specified in the bill.

In simple terms, if you have no “nexus,” you don’t have to collect sales taxes from S.C. residents.

“You’re saying that you made the law that all other states have followed, and now you want to make an exception for Amazon?” McDowell said. “I think you may have other companies that would challenge the statute to say it’s invalid.”

McDowell said he is not representing anyone in the dispute.

Setzler, who is a family law attorney, and Amazon representatives did not respond to written and phone messages last week from The Nerve seeking comment.

Supporters say Setzler’s bill, which was introduced Wednesday, would keep Amazon from pulling out of South Carolina – and taking an announced 1,249 full-time jobs with it. Among other things, they point out that a state incentives agreement with Amazon requires the S.C. Department of Commerce to seek the legislation.

Opponents say the bill would give Amazon an unfair competitive advantage over retailers who have to collect sales taxes from S.C. residents. They point out that Amazon, which had net sales last year of $34 billion, already is getting plenty of taxpayer-funded incentives.

The Nerve last month first reported that according to a state financial impact analysis, Amazon’s incentives deal would cost taxpayers an estimated $39.5 million over 10 years. The taxpayer costs over the period would include nearly $26 million in job tax credits and job development credits, about $7 million in increased state and local education costs, $3.7 million in worker training, and a $2.5 million state grant.

And that doesn’t include the millions Amazon likely would save in county property taxes through a fee-in-lieu-of-taxes agreement obtained by The Nerve. Also, the Lexington County Council in December repealed the county’s “blue laws,” which banned most retail sales on Sundays before 1:30 p.m., to accommodate Amazon, according to other media reports.

Although Setzler’s bill does not mention Amazon by name, it likely would affect the Seattle-based company only given the way it is written.The bill, for example, would apply to a distribution facility “in service” after Dec. 31, 2010, but before July 1, 2012; and which had created at least 1,249 full-time jobs before Jan. 1, 2013, and had an investment of at least $90 million before July 1, 2012.

Besides a possible court battle over the proposed sales tax-collection break, there are some other sides of the Amazon saga that have gotten little, if any, media attention.

For instance, since 2005, Amazon has owned an online self-publishing company in North Charleston called BookSurge, a brand of On-Demand Publishing that merged in 2009 under the name of another On-Demand publishing firm, CreateSpace, according to CreateSpace’s website. Self-published products through those firms can be sold on Amazon.com.

That might not seem like a big deal on the surface. But if Setzler’s bill becomes law, it might be deemed irrelevant by the S.C. Department of Revenue if the agency determined that Amazon already has a “nexus” through BookSurge.

“If I were Amazon … I would require that kind of ruling (from the Department of Revenue) before I would make a substantial investment,” McDowell said.

McDowell added, however, that the BookSurge link to Amazon might not be an issue with the Department of Revenue if On-Demand Publishing, the listed Amazon subsidiary, were set up as a separately taxed entity.

Revenue spokeswoman Samantha Cheek did not respond to written and phone messages last week fromThe Nerve. BookSurge representatives also did not respond to The Nerve’s inquiries.

In a related matter, a report last year by the legislatively created S.C. Taxation Realignment Commission (TRAC) recommended that any out-of-state retailer with sales to South Carolina residents of more than $10,000 annually be required to collect state sales taxes if it had a “contractual arrangement with a South Carolina resident to refer business.”

The report described the proposal as the “Amazon attributional nexus provision.”

“As with its exemption recommendations, TRAC recommends that 100 percent of any revenue that may be generated by adopting statutory changes that facilitate greater sales tax collections from Internet purchases should be used by the Legislature … for dollar-for-dollar (commensurate) sales tax rate reduction,” the report said.

TRAC was headed by Burnie Maybank, a two-time former director of the state Department of Revenue and a Columbia attorney with the go-to economic development law firm of Nexsen Pruet. Maybank was a key player in an incentives package, estimated earlier by The Nerve to be at least a half-billion dollars, offered to the Boeing Co. for its aircraft assembly plant in North Charleston.

Maybank also represents home shopping network QVC, which opened a distribution center in Florence County in 2007.

Under an expired state law, QVC had received the sales tax-collection exemption that Amazon is seeking, Joe King, the Florence County Economic Development Partnership director, confirmed when contacted last week by The Nerve.

King said QVC officials have not informed him that they want an extension of the exemption.

“They have not expressed it to me, and I stay in pretty good contact with QVC,” he said.

King said he doesn’t know the reason behind QVC’s apparent disinterest in the extension and referred further questions to company officials. Representatives at the company’s corporate office in West Chester, Pa., did not respond last week to a phone message from The Nerve seeking comment.

Maybank declined comment when contacted last week by The Nerve.

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