amazontaxOne of Amazon's advantages over physical retailers has been that its sales have largely been free of state sales tax. That just changed.

More precisely, up through the first half of 2012, Amazon only collected use or sales tax from residents of five states, representing fewer than one of every nine consumers in the whole US population. After a complicated sequence of court cases and negotiations, though, Amazon is on a schedule that has it collecting tax within more and more states. It added Texas on the first of July 2012, and by New Year's Day 2014, coverage will extend to twelve states, including almost 46% of the whole population. "Use tax" is legal jargon for sales tax collected by an out-of-state vendor.

Merchants throughout Texas have been celebrating lately, along with government units; state Comptroller Susan Combs estimated that $600 million annually in state sales taxes are lost to untaxed Internet sales.

One possible consequence of the use tax expansion is increased competition in at least a few jurisdictions: Amazon had deliberately kept distribution centers (DCs) and other physical places of business out of certain states for legal and tax reasons. With its commitment to collect taxes in Texas, California, and other high-population states, it seems likely that the company will open more DCs near its biggest markets. The company might become even more aggressive in offering rapid delivery or other service benefits.

It's natural to expect a few stumbles during roll-out of the new tax collection, and Amazon certainly makes mistakes during its day-to-day operations. However, the company has demonstrated considerable skill to this point in what once was one of the hardest parts of use tax collection: coding taxes by merchandise type and local variation. New York, for example, where Amazon has collected use tax since 2008, has rates that vary by geography, item, and even sales price. The tax rate on sale of a pair of shoes in New York States differs in different counties and cities, and currently depends on whether the pair costs more or less than $110.

Not only has Amazon accommodated these variations with a low error rate, but TaxCloud, an on-line sales tax calculation service, is available now to all online retailers at no charge.

The bottom line? Tax collection by Amazon and other online competitors will likely slow their growth, but not stop it. Local retailers need to stay in touch with consumers, and continue to improve their own operations.

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