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UPDATE 8/12/11: It appears there may now be a third path forward. The Tennessean reports that Gov. Haslam recently began negotiations with Amazon in order to have the company collect sales taxes. Such a deal would likely involve giving the company hefty subsidies.

Traditional “brick and mortar” retailers are becoming increasingly frustrated that Amazon.com and other online retailers aren’t collecting sales taxes owed on their customers’ purchases.  Online shopping makes up a significant (9%) and fast-growing share of all retail sales, and many online retailers are using their exemption from collecting sales taxes to expand that share. 

Against this backdrop, a group representing some of Tennessee’s most powerful retailers recently threatened to file suit if Amazon.com is not required to collect sales taxes – just like traditional sellers – when two new distribution centers in the state are up and running.

The saga in Tennessee began when former Governor Phil Bresden struck a backroom deal with Amazon while on his way out of office.  The deal reportedly included a promise that the Internet giant would not have to collect sales taxes in Tennessee, even if the company established distribution centers in the state (which by most accounts would constitute “physical presence” and therefore require that the company collect taxes).

But a regulation that would have cemented the deal failed to make it onto the books, and now Amazon is on less certain footing in claiming that it does not have to collect taxes because the new distribution centers are technically owned by a subsidiary, not Amazon itself.  This line of argument is basically identical to one the company tried to use in Texas, so far unsuccessfully.

At this point, there are two separate paths forward for making Amazon collect sales tax just like most other retailers.  First, lawmakers could pass legislation clarifying that the company is in fact subject to the state’s sales tax collection requirement.  Legislation that would have done exactly that stalled in the last session while its sponsors waited for legal guidance from the state’s Attorney General (he eventually confirmed that the legislation would have been constitutionally permissible).  The sponsors are apparently interested in pushing for the legislation again in 2012.

The second path would go through the courts.  The Retail Industry Leaders Association – which includes such heavyweights as Wal-Mart, Best Buy, and Home Depot – recently announced that it may file suit if the state does not force Amazon.com to begin collecting sales taxes once the company’s new distribution centers begin operating.  While details of the suit remain sparse, it would presumably try to show that Amazon.com does in fact have a physical presence in the state, all claims about “subsidiaries” to the contrary.  If the courts agree on that point, Amazon will likely be required to collect sales tax.  The legal requirement that sellers collect the tax is not optional and could only be waived through actual legislation, not just a secret agreement with the Executive Branch.

Ultimately, the legislative path is more straightforward than going through the courts, but if Amazon is able to scare enough lawmakers into opposing the legislation, it’s oddly reassuring to know that big box retailers are prepared to fight for a more even-handed application of the state’s sales tax laws.

Photo via Markuz and Brent Nashville Creative Commons Attribution License 2.0