Did Deal with Amazon Violate State Law?
May 13, 2011 (Austin American-Statesman, Texas) Texas Comptroller Susan Combs' settlement with Amazon.com hailed by the company's allies and rivals alike is an unprecedented solution to a vexing standoff.
The world's largest online retailer agreed that on July 1, it would begin collecting sales taxes in Texas, just as its brick-and-mortar rivals do, while promising to bring 2,500 jobs and $200 million in capital investment to the state over four years.
Amazon owed $269 million, according to its filings with the Securities and Exchange Commission, but paid an "immaterial payment" as it resolved its tax dispute with Texas.
Never before had a Texas comptroller accepted the promise of jobs and business investment to settle a tax dispute.
But is it legal?
Austin lawyer Buck Wood, a tax attorney and a former deputy comptroller and general counsel under the late Comptroller Bob Bullock, says no.
"While this may seem to be a reasonable resolution in people's minds," Wood said, "it's not worth the paper it's written on. She just can't do it."
Wood argued that the state's constitution bars "forgiving" tax debts and that the settlement raised the specter of creating a "too big to pay" class of taxpayers who get preferential treatment.
He said it sets a bad precedent in a growing Internet economy when Combs has estimated that Texas loses $600 million a year on untaxed online sales.
Combs, through her aides, said she legally cannot discuss individual cases. Speaking generally, however, she denied ever "forgiving" taxes in violation of the constitution.
Amazon declined to comment.
Several lawyers -- inside and outside the comptroller's office -- disagree to various degrees with Wood's interpretation of the one statute that gives the comptroller authority to settle cases when the "costs of collection" exceed what is owed.
Wood interprets that phrase to be limited to the cost of litigation, while others say the comptroller can weigh other factors, including future benefits to Texas, under that language.
"We consider the risk of adverse decision and the upside of obtaining compliance with tax laws when deciding whether to settle a case," Combs said through aides.
The issue could be punted to Texas Attorney General Greg Abbott for his opinion, if lawmakers request it, or a local government could challenge the settlement because it includes local as well as state sales taxes.
Judging the settlement is complicated by the secrecy surrounding it.
State law protects businesses -- including publicly traded companies such as Amazon -- by keeping confidential their tax information, including settlements.
Amazon could waive the confidentiality and disclose the "immaterial amount" it paid to settle the case, but it declined to do so.
The confidentiality statute also makes it impossible for the public to judge the comptroller's actions.
"We don't know how to evaluate this case because we don't know the facts," said Skip Smith, a retired tax lawyer from Austin.
There is an assumption among tax professionals, however, that Amazon paid less -- possibly a lot less -- in back taxes or it wouldn't have settled.
Billy Hamilton is not a lawyer, but he is a former deputy comptroller who has settled many cases, including some controversial ones. He defended Combs' authority to settle cases but said people can still question the deal.
"There obviously was a quid pro quo," Hamilton said. "You walk away from a quarter of a billion dollars, but you get jobs. It's a question of judgment."
Hamilton said the Legislature can provide a check-and-balance to a comptroller abusing the secretive system. He said lawmakers can request the settlement's details but cannot share them with the public.
Hamilton said several states recently have relaxed confidentiality in tax settlements.
"Personally, I'm not in favor of releasing tax information," Hamilton said. "But in the age of transparency, it becomes more squishy."
Combs has championed transparency in government since becoming comptroller in 2007. Her agency maintains a "Texas Transparency" website that details state revenue and spending. And she has encouraged local governments to open up their books.
Asked if she supports keeping tax settlements secret, Combs said, through her aides, that she follows the law.
In this instance, Amazon and Combs are having it both ways.
Amazon agreed that Combs could disclose the number of promised jobs and the amount Amazon would invest in Texas over the next four years.
But Lauren Willis, the comptroller's communications director, said Amazon insisted that the remainder of the deal be kept secret.
In other economic incentive agreements, the state has added "clawback" provisions that force companies to repay the state if they fail to deliver.
However, Willis said she could not discuss how -- or whether -- Texas is protected if Amazon fails to deliver the promised jobs or investments.
"We intend to work with Amazon to keep the public informed regarding their progress," Combs' staff responded in an email.
The American-Statesman has requested the entire agreement with Amazon under the Public Information Act.
In the email, the comptroller's office said it would seek the attorney general's opinion "as to what we may and may not release."
'No gray line'
Even without the details, Wood said, he thinks the legal case against Amazon is clear-cut.
A 1992 U.S. Supreme Court decision, Quill Corp. v. North Dakota, said a company with a physical presence in a state can be required to collect sales tax.
Combs argued that Amazon was responsible for sales taxes it should have collected from 2005 through 2009 because an Amazon subsidiary shipped goods to Texans from an Irving warehouse.
Last year, Amazon shut the facility in protest, eliminating 119 jobs.
Gov. Rick Perry sided with Amazon, but the Legislature last year spelled out that retailers with warehouses or distributions centers in the state must collect sales tax.
Wood, who has represented companies with similar disputes to Amazon's, said state law already covered subsidiary-owned warehouses.
"There is no gray line here," Wood said. "Amazon owed the tax."
Last month, Amazon officials, who have been settling similar cases in other states, approached Combs about resolving the company's dispute with Texas.
That's where Combs violated the constitution, Wood argued.
He cited two articles in the constitution that, in essence, say the Legislature cannot forgive tax debts or delegate that authority.
Wood said the language, dating to the state's early history, attempted to prevent officials from forgiving the debts of taxpayers with political influence.
There is one exception.
Wood and the comptroller's office cited the same law that allows the comptroller to settle tax disputes, but they disagree on how broadly it can be applied.
The law says the comptroller may settle a claim for a tax, penalty or interest if the "total costs of collection" would exceed the amount due.
Wood said that if the $269 million tax bill is accurate, there is no way the cost of litigation and collection would approach that figure.
"Amazon just saved themselves $269 million," Wood said. "Nothing is going to come out of their pockets," except whatever "immaterial amount" the company is keeping secret.
But under Combs' broader view of the statute, she weighed the benefit of getting the world's largest online retailer to start collecting sales taxes in Texas.
She has touted the settlement as "the best in the United States" because Amazon agreed to begin collecting state and local sales taxes within 60 days of its settlement with Texas, not years, as in some states where it settled similar claims.
Smith, a retired tax lawyer who has represented clients in disputes with the state, said the comptroller's authority to settle cases is not as broad or explicit as, say, the Internal Revenue Service's.
"They don't really have a provision that gives them the right to settle based on the hazards of litigation," he said.
Still, Smith said, "The comptroller, day to day, is settling these cases."
He said the Legislature "hit Amazon between the eyes" when it changed the law last year. But he said it also gave Amazon another legal argument: Did the Legislature add the new language just to clarify the law or because Amazon wasn't covered by the existing statute?
"It's arguable," Smith said.
Smith said the fact that the Irving site was owned by an Amazon subsidiary clouds the issue.
"If it's a subsidiary's warehouse, it becomes grayer," he said. "I think this issue is not totally settled."
Steve Bickerstaff, an Austin lawyer with a background in constitutional law, takes a different tack.
"It is never in the interest of the state to pursue a claim if the State of Texas is going to lose and there is a good alternative," Bickerstaff said.
He said the constitutional prohibition against forgiving tax debts is not absolute.
The attorney general can settle litigation, Bickerstaff said, and he suspects the courts would extend the same consideration to the comptroller if someone challenged it.
As to whether the "costs of collection" in the Amazon case justified a settlement, Bickerstaff said he thinks the comptroller could weigh the company's tax bill versus future benefits to the state as well as the threat of a bad precedent if the state lost in the courts.
"It all turns on the definition of costs," he said. "I would argue that the statute contemplates the state look at all these factors."