NASHVILLE - Who doesn't like buying online, when the retailer isout of state and doesn't collect sales taxes? It's an automatic 9.25percent price advantage for the retailer and the consumer, who'susually unaware that he owes the tax anyway.
That issue played out in the Tennessee legislature again thisyear, and it has short- and long-term ramifications for Tennesseans'pocketbooks and potentially their jobs.
On the surface, the legislative battle was Amazon.com versus Wal-Mart, AutoZone and other large and small retailers in Tennessee thathave to collect sales tax in their stores and on their websites.
Amazon , the Seattle-based Internet giant, doesn't have tocollect tax on products shipped to Tennessee because, so far, itlacks the substantial physical presence in the state that requiresit. (It does collect sales tax on products sold through its websiteby "third-party" Tennessee retailers to Tennessee residents; that'snot at issue.)
But Amazon wants to build two distribution, or "fulfillment"centers, in the Chattanooga area. Some state legislators, lawyersand a coalition of retailers say the centers constitute the physicalpresence in Tennessee that will require the online retailer tocollect sales tax on in-state sales.
Amazon executives dispute that, arguing that fulfillment centersare not retail operations. But the company wants assurance fromTennessee that it won't try to force Amazon to collect tax and leadit into a courtroom battle.
The lure of a $140 million capital investment and 1,200 new jobsprompted state officials - first the administration of formergovernor Phil Bredesen and now that of Gov. Bill Haslam - to cut asecret deal with Amazon to exempt it from its tax collectionobligation.
The recently ended 2011 legislative session provided more thanthe usual share of spectacles, including Republicans openly mockingteachers, a House committee berating a Vanderbilt professor whospoke against the teaching of creationism in schools, and a bill tostudy whether Tennessee should create its own currency, to cite afew.
But one of the biggest spectacles of the year unfolded as theSenate Finance Committee sought to get to the bottom of the Amazondeal.
Rarely have a senior executive branch official and a topexecutive of a global corporation sat before an importantlegislative committee and denied legislative committee requests forinformation.
The General Assembly is to state government what a board ofdirectors is to a corporation: It sets state policy through theenactment of laws, and tries to see to it that the executive branchexecutes the laws. If there was such a deal with Amazon, it wouldhave amounted to an alteration of state tax policy without theprerequisite legislative approval, lawyers said.
After media reports about the deal and a lobbying blitz by "MainStreet" retailers against it, the chairmen of the House and Senatefinance committees drafted a bill to force the state Department ofRevenue to enforce the tax law.
Sen. Randy McNally, R-Oak Ridge, Rep. Charles Sargent, R-Franklin, and other lawmakers said they were concerned such a dealwould violate state law, erode the sales tax base that enablesTennessee to operate its government without a general state incometax and give Amazon a state-sanctioned price advantage of nearly 10percent over Tennessee retailers.
So the Senate Finance Committee that McNally chairs summonedrepresentatives of Amazon, the coalition of businesses that opposethe tax break and the Revenue Department to testify over twoseparate days.
Sen. Douglas Henry, D-Nashville, called Revenue CommissionerRichard Roberts to the witness table and asked: "Are you able to saywhether in the absence of this bill and if these warehouses areconstructed you would call on these people to collect sales taxes?"
Roberts: "Senator, I believe that the statutes that apply to theconfidentiality requirements of my department prohibit me fromdiscussing any relationships between the taxpayer and the departmentwithout their consent."
Amazon had refused consent. Sen. Doug Overbey, R-Maryville, askedPaul Misener, vice president for global public policy forAmazon.com, if he would release the department's letter ruling and"alternative arrangement" that detailed the deal.
Overbey: "The question about releasing the letter ruling - Ididn't quite understand your answer."
Misener: "A couple of reasons we are reluctant to do that. Theseletter rulings are in the context of specific fact patterns andoften require the relinquishment of very propriety information wewould not want competitors to see. It's very unusual to be asked todo this. None of the other states in which we have received suchrulings have ever pressed us to do this. They recognize they have togive some latitude to companies to negotiate freely and openlywithout fear that information is going to be received.."
Overbey: "So I take it that is a no."
Misener: "Yes, sir."
Like most of the eight other states without a broad-based tax onearned income, Tennessee relies heavily on sales taxes. They fund 54percent of the state budget and 60 percent of the general fund,which pays for almost everything except roads and what the statesends to cities and counties.
Two U.S. Supreme Court decisions (National Bellas Hess v.Illinois in 1967 and Quill Corp. v. North Dakota in 1992) held thatthe Commerce Clause of the U.S. Constitution bars states fromrequiring out-of-state retailers to collect taxes on mail-ordersales unless the retailer has a "substantial" physical presence inthe state, called "nexus."
Think Sears in the days of its big, thick catalog s, plus itsretail stores.
Misener told the committee that his company believes the physicalpresence has to be a retail center where sales occur, and that awarehouse from which goods are shipped to fulfill orders placedonline doesn't qualify.
But William Hubbard, a former deputy Tennessee attorney generalwho represents a coalition of big-box retailers called the RetailIndustry Leaders Association, told the committee that federal andstate law are clear: The distribution centers trigger collection ofthe sales tax.
" The determination of whether a substantial nexus exists turnson the company's physical presence in the state. It does not matterwhether the in-state activity is related to the sale of the goodsupon which the tax is collected," Hubbard said.
He suggested to the committee that if the Revenue Department hasissued a letter ruling or an alternative arrangement exemptingAmazon from tax collection, it is violating the law and it wouldopen the door to discrimination lawsuits by other retailers.
But Amazon held the trump card that mattered with thelegislators: the promise that it would pull the plug on theTennessee centers and their jobs if the state moves to force it tocollect taxes.
Amazon had done just that in South Carolina and Texas.
"A year ago, we were getting prepared to put 1,200 jobs and $70million investment in the Dallas-Fort Worth area," Misener said."Their state comptroller got very aggressive, and we thoughtunfairly, with us. Those jobs and investment are now in Arizona."
At the conclusion of the hearings, McNally withdrew the billrequiring the Revenue Department to enforce Tennessee's tax law, butsaid the committee had identified three issues to review next yearafter the state attorney general opines on several issues:
"First is transparency: Do the people of Tennessee have a rightto know details and terms of agreements that would nullify thecollection of sales tax when it's clear that the statute mandatesthat?
"Second is there's a concern about the erosion of our tax base,and by granting (an exemption) to an out-of-state retailer who has aphysical presence in Tennessee, are we discriminating against otherretailers in similar situations? Do they take us to court, and aspart of the relief, there is danger the state could lose additionalamounts from the sales tax base.
"Third and finally, Amazon receives the benefits of stateservices and it's exempted from collecting sales tax from Tennesseeconsumers. Local retailers receive the same benefits and theycollect those taxes ," McNally said.
Driving home that point was Bryan Campbell, vice president andhead of the tax department at AutoZone.
He told the committee his company applauds efforts to recruit newbusiness and jobs, "but these deals should not be made at theexpense of existing business and industries who are responsiblecorporate citizens."
AutoZone has 157 stores in Tennessee, a distribution center inLexington, Tenn., and its corporate headquarters in Memphis,totaling over 4,000 jobs in the state. Last year it collected andremitted $19 million in sales tax, in addition to its other taxes.
"We helped provide the funding that builds roads, provides policeand fire protection and pays teachers' salaries and much more. Lastmonth, the governor acknowledged that historically more than 85percent of jobs created in Tennessee come from existing businesses.Only 1.2 percent of jobs come from attracting new businesses. Whatwe're doing here is turning our backs on existing business, bricks-and-mortar retailers who are creating jobs," Campbell said.
"The state should not be in the business of picking winners andlosers, cutting special secretive deals to give one entity advantageover another. It's not fair for the future of Tennessee because thisdeal could mean millions and eventually billions of dollars in lostrevenue to the state over time."
Senate Majority Leader Mark Norris, R-Collierville, a member ofthe Finance Committee, said he didn't like the process that leftlawmakers in the dark. "I found that offensive and that needs to befixed. I suspect it will be."
Richard Locker is The Commercial Appeal's Nashville bureau chief.Contact him at (615) 255-4923.
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Big Bucks for Big Business
Amazon.com was not the only business that won at the Tennesseelegislature this year. Like most states, Tennessee has for severalyears offered tax credits, employee job training and the expansionof roads and utilities to plant sites, all at taxpayer expense.
But the state crossed a new threshold this year, offering directaid to companies (through local industrial development boards) toactually pay for the construction and equipping of factories, aswell as other subsidies.
Lawmakers approved:
$97 million in state bond funding toward a new $190 millionElectrolux home products manufacturing plant in Memphis.
$150 million to expand the new Hemlock Semiconductor plant inClarksville.
$34.6 million more for a new Wacker Chemie plant in Cleveland.
$10 million for a Horsehead Corp. facility near Rogersville.
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