United States Supreme Court

Amazon loses a battle but still fights the war on state sales tax

December 4, 2013: 8:00 AM ET

A New York state tax law remains intact and brings an old issue to the forefront.

Kiva's factory robots are now deployed in at least three fulfillment centers, Amazon said this week.

FORTUNE -- For Amazon, it's not a matter now of whether the company will collect sales tax in many states, but when.

On Monday, the U.S. Supreme Court let stand a ruling from the New York Court of Appeals requiring Internet retailers including Amazon (AMZN) collect sales tax regardless of whether they have a physical presence in the state. Amazon and online retailer Overstock.com (OSTK) had previously argued that the 2008 law demanding companies without in-state physical facilities tax in-state customers was unconstitutional. After all, Amazon's ability to undercut the competition, including brick-and-mortar retailers, historically stemmed in part from tax-free sales.

It's the latest in a larger ongoing battle that Fortune earlier this year estimated costs state and local governments $11.4 billion a year "in desperately needed cash for streets, schools, police, and parks." Indeed, Amazon has fiercely fought off collecting individual state sales taxes for over 15 years, and consequently managed to offer pricing up to 10% lower than other retailers.

MORE: Inside Amazon's tax fight

Brick and mortar stores should be pleased, since many have previously argued it was unfair that physical retailers be taxed and online retailers go tax-free. "It [the law] increases the competition not only for the pure online plays -- the Amazons, eBays (EBAY), and others -- but also helps the brick and mortar stores level the playing field," explains Gene Alvarez, Research Vice President for Gartner Inc.

Already, Amazon collects taxes in 16 states including California and Texas, where it has warehouses. (The company does not have a warehouse in New York State but opened a photo studio in Brooklyn this October.) Collecting sales tax in other states seems to be an inevitability, given the company's rapidly expanding footprint: The company has opened at least 50 new warehouses since 2010, part of a $13.9 billion investment in overall fulfillment expenses, Bloomberg reported this fall. Come January 2016, when proposed warehouses will be open in at least 20 states, Amazon will have to collect taxes from roughly half of the U.S. population.

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The way Sucharita Mulpuru, a Forrester Research analyst, describes the situation, it's downright Sisyphean. "At this point, I think Amazon just wants to delay sales tax collection for as long as it can," she says, arguing the company is well aware its competitive strategy must eventually change -- it's simply a matter of when.

But Amazon hasn't given up on intervention on a national level just yet. In a statement issued Tuesday, Amazon called on Congress to devise a national solution instead of letting sales tax be dictated on a state-by-state basis, likely spurred by Bezos himself, who has previously called local tax collection "horrendously complicated."

If and when that happens, the playing field for retailers will be more level but may do little to diminish Amazon's massive dominance.

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