You’ve probably heard about Amazon.com recent $269 million Texas sales tax settlement with the Comptroller. Back in 2010, the Comptroller alleged that under existing state law, Amazon should have been collecting Texas sales tax from all of its Texas customers. Then in 2011, the Legislature balanced the budget by adding a provision to the tax code making it clearer that companies like Amazon should be collecting tax from customers (See article 30 of Senate Bill 1, passed in the first special session). The Comptroller’s $269 million claim against Amazon arose from transactions occurring before the effective date of the law change.
The Texas Sales Tax Settlement Agreement
Under the terms of the announced Texas sales tax settlement, the Comptroller will drop its $269 million claim against Amazon. In exchange, Amazon will pay a small amount to the Comptroller, and agree to make at least $200 million in capital investments and create at least 2,500 jobs in the state. Most importantly, Amazon has agreed to begin collecting sales tax from its Texas customers by July 1, 2012.
This Texas sales tax settlement is unusual; it’s rare for the Comptroller to include provisions for job creation and capital investment provisions in settlement agreements. We cannot overlook the fact that this is a high-profile case, and Comptroller Combs has her eyes on the Lt. Governor spot in 2014. Obviously, this will be a rather large feather for her cap in her campaigning days ahead.
Is the Agreement Constitutional?
Earlier this week, the Austin-American Statesman published an interesting article about whether the Comptroller has the authority to even enter into such a Texas sales tax settlement settlement agreement. Austin attorney Buck Wood points to a provision in the Texas Constitution that forbids the Legislature from forgiving debts (or authorizing others to forgive debts) owed to the state for less than ten years. According to the article, Mr. Wood believes that Amazon clearly owed the $269 million, and therefore the Comptroller’s settlement with Amazon violates the Texas constitution.
I don’t share Mr. Wood’s certainty that Amazon owes the tax, but he may be aware of additional facts that I don’t know. For instance, I believe that Amazon almost certainly filed an administrative redetermination request when it received its $269 million Texas sales tax bill from the Comptroller. It’s possible that the constitutional provision doesn’t apply because the bill isn’t a “liability” to be forgiven until the determination is final. In other words, the provision is only meant to prevent the state from forgiving tax debts that taxpayers unquestionably owe; it’s not meant to tie the state’s hands while it negotiates matters in controversy.
The Texas 2011 “Amazon Law”
I think that both the Legislature and the Comptroller agree that its questionable whether Amazon owed the $269 million. Otherwise, why did they find it necessary to amend the tax code in 2011 to put Amazon squarely in the crosshairs? This is when Texas passed its own “Amazon Law.” One could argue that the 2011 amendment was a mere “clarification” instead of an actual change, but that’s not what the House’s Bill Analysis of Senate Bill 1 says (stating that the bill “adds . . . business activities that establish a retailer as being engaged in business in Texas.”). It’s also not what the Comptroller’s Fiscal Note for the bill suggests (estimating that the new law increases state revenue by $16 million for 2012 and 2013).
Moreover, it’s ultimately not even up to the Legislature or the Comptroller to determine whether Amazon must comply with the state’s sales tax laws. That’s ultimately up to Congress, according to the Commerce Clause of the U.S. Constitution.
Who Would Challenge Amazon’s Agreement?
Even if the agreement does violate the Texas Constitution, its unclear who would go to the trouble of filing suit. Obviously, Amazon and the Comptroller are fine with the settlement. Amazon’s competitors that have been collecting Texas sales tax should now be satisfied that the playing field is a little more level as of July 1. Any local municipality that wanted a piece of the forgiven $269 million will likely be placated when it begins to receive some of Amazon’s tax collections; these local governments may also benefit from the promised capital investment and hiring. The biggest losers in this deal are Amazon’s customers, who now must pay Texas sales tax, but these stakeholders are more likely to voice their disapproval by switching online vendors than by filing court challenges.
The most likely scenario where we may see a challenge is if the Comptroller pursues one of Amazon’s competitors, and doesn’t offer it the same deal. But then the competitor will most likely argue that the Comptroller must offer it a similar agreement under the equal taxation provisions of the Texas Constitution, instead of arguing that the Amazon agreement is invalid.
As internet selling becomes even more popular, these issues will become even more critical to the states and taxpayers. I’ll have more to say about Amazon and other internet sellers in future posts.