Amazon Overcomes Objections, Wins South Carolina ‘Incentives’

Published June 8, 2011

South Carolina lawmakers have approved economic “incentives” for an distribution center in Cayce, just outside the state capitol of Columbia. The approval overcame objections from conservative lawmakers who called the deal unfair to other retailers.

The main tax break would come in the form of a five-year exemption from collecting sales tax on merchandise that passes through the center and is sold to South Carolina customers. State officials estimate the break will cost the state treasury $10 million to 15 million annually.

In addition to the sales tax break, South Carolina and local governments are providing a free site for the center, property tax reductions, state job tax credits, and repeal of Lexington County’s restrictions on Sunday morning sales to enable the facility to run round-the-clock.

Gov. Nikki Haley (R) said she opposed the deal but would not veto it if lawmakers approved it. Debate began last spring. In April she told reporters the incentives would be unfair and cited the example of outlet-mall mogul Steven Tanger, who had spent $43 million of his own money and created 350 jobs in the state without receiving government “handouts.”

Loss for In-State Retailers
The vote was a significant defeat for Wal-Mart, Best Buy, Home Depot, Target and other brick-and-mortar retailers who complained their online rival is receiving an unfair advantage. Those stores will continue to have to collect sales tax on purchases made in their South Carolina stores.

South Carolina is the latest front in an escalating nationwide battle over whether and how states should seek to capture e-commerce tax revenue. Supreme Court rulings have stated online retailers do not have to collect sales tax unless the retailer has a physical presence in the state where the purchase is made. Persons who buy items out of state, including from an out-of-state online retailer, are supposed to pay their state a “use tax” – equivalent to the sales tax – but the tax collections are almost impossible to enforce.

Amazon promised to notify South Carolina customers of their use tax obligation.

With e-commerce constituting a growing share of economic activity, the stakes are growing. In 2009, researchers at the University of Tennessee projected state and local governments would lose $11.4 billion in fiscal year 2012 by not collecting sales tax on e-commerce transactions. The researchers pegged the six-year total loss from 2007 to 2012 at $52 billion. Of course, another way to look at it is consumers would save those amounts.

Helping Big Get Bigger
Whereas large companies such as Amazon often receive tax breaks and other economic incentives, smaller firms rarely receive the same considerations. Amazon officials say their South Carolina distribution center will provide about $125 million of construction spending and employ approximately 2,000 persons.

“The legislators hope a large company like Amazon can make a big investment in the state in return for the benefit, and they fear that it will locate elsewhere if the benefit is not provided,” said Daniel Schibley, senior tax analyst for Riverwoods, Illinois-based CCH, a Wolters Kluwer business. “While the legislation means Amazon would be able to continue to not collect sales tax on its South Carolina orders, state residents would continue to be liable for use tax on these purchases.

“Of course, the compliance rate for use tax among individuals is extremely low. South Carolina is hoping, however, to increase individuals’ awareness of these use tax responsibilities. Also, while the state would be foregoing the potential for additional sales tax, it hopes for additional revenue from the income tax paid by those employed at the distribution center and increased property taxes paid on the facility.”

Schibley added, “Smaller companies, unfortunately for them, generally cannot offer to make investments in the state of sufficient size to sway legislators. Also, most small companies are not sufficiently mobile that they can realistically threaten to leave the state if they are not given tax benefits.”

Unfair Advantages
Tracey Sellers agrees. She is managing director of the Chicago office of True Partners Consulting.

“It would be difficult for a small online retailer to get the same deal, since the South Carolina Legislature claims it was approved based on the 2,000 jobs being created,” Sellers said. “If several small online retailers were to join forces to open some type of co-op distribution center and were able to invest that much capital and guarantee that many jobs for the state, then that would probably be the only way for the small online retailer to benefit.”

The new businesses in these types of deals, in this case Amazon, also receive benefits typically not afforded to legacy businesses.

“The traditional brick-and-mortar retailers are not pleased with the law,” Sellers said. “I think that we will probably see more of this around the country. Online retailers that are not currently collecting any sales tax from a given state do not take the revenue out of the state’s budget since [the states] never had it to begin with.”

Phil Britt ([email protected]) writes from South Holland, Ill.