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NORTH AMERICAN REPORTS
From Site Selection magazine, March 2011
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by ADAM BRUNS

Amazon’s Spreading Presence Creates Jobs. Does It Create Nexus Too?

Fulfilling Activity: From new data centers to a flurry of new fulfillment centers, Amazon.com’s real estate holdings are beginning to rival its massive selection of products.
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mazon.com now has 52 fulfillment centers, having moved forward with 13 in 2010 alone, plus a pair of newer projects in Scotland that will create 1,000 jobs. It's quite the real-world portfolio for this most virtual of companies. But that heft is bumping up against some real-world challenges as jurisdictions try to collect taxes on Internet sales. In Texas those challenges may lead to the state losing 1,000 jobs, but possibly winning uncollected tax revenue.

In late December Amazon.com committed to build two new fulfillment centers in the Chattanooga, Tenn., area, investing $139 million and creating 1,400 jobs in the pair of facilities, one in Hamilton County and the other in neighboring Bradley County. "We're excited to be opening two new facilities in Tennessee to allow us to serve customers more quickly and efficiently," said Dave Clark, vice-president, North America operations, Amazon.com. "We're thankful for the continuing cooperation of Governor Bredesen, Governor-elect Haslam, and the Department of Economic and Community Development, as well as the county and local officials."

Among the new members of Haslam's team is Claude Ramsey, who serves as deputy governor and chief of staff after 33 years of government service in various guises in Hamilton County. Trevor Hamilton, vice president of economic development for the Chattanooga Area Chamber of Commerce, said leaders from Volkswagen also helped make the Amazon.com project a success.

Other new facilities or expansions are under way in locations such as Whitesburg, Ind.; Phoenix, Ariz.; and Campbellsville, Ky. The company also is making inroads in Canada, thanks to approval by national authorities according to the Canada Investment Act, and continues on the latest phase of its headquarters expansion in Seattle.

The new fulfillment centers may help Amazon.com chip away at net shipping costs that rose 58 percent between the fourth quarters of 2009 and 2010, according to financials announced in late January. That concern notwithstanding, Amazon.com realized its first $10-billion quarter in the fourth quarter of 2010, achieving more than $12.9 billion in sales, a 36-percent increase over the fourth quarter of 2009. It now employs 33,700 people, a 39-percent year-over-year increase, which doesn't count thousands of holiday positions filled in such locations as Campbellsville and Lexington, Ky.

Level Field?

But according to a memo from Dave Clark that was obtained by the Associated Press in February, approximately 1,000 new positions and an unknown number of existing jobs in Texas have now apparently vanished, as Amazon.com has pulled out of an announced expansion in Lewisville as well as an existing fulfillment center in Irving due to its tax dispute with the state. The State Office of Administrative Hearings (SOAH) is currently reviewing the case, in which the Texas Comptroller's Office seeks $269 million in uncollected sales taxes. The language of the state's sales tax nexus statute appears to make a clear case that Amazon would be subject to payment of the tax.

States where Amazon does business and charges sales tax include Kansas, Kentucky, New York, North Dakota and Washington. States where it distributes products but does not charge sales tax include Arizona, Indiana, Nevada, Pennsylvania and Virginia.

Allan Spelce, spokesman for the Texas Office of the Comptroller, says confidentiality provisions in tax law prevent his office from sharing any details of audit documents. He also says the case has not been assigned a docket number at SOAH. Amazon is being represented in the case by David Cowling an attorney with the Jones Day law firm in Dallas. Cowling referred an inquiry to Amazon.com. An Amazon.com tax official and Amazon.com media relations did not respond to inquiries.

"We regret losing any business in Texas, but our position hasn't changed," said Spelce in the comptroller office's official statement. "If you have a physical presence in the state of Texas you are responsible for sales tax just like any other business located in the state. We estimate that Texas annually loses about $600 million to Internet sales in lost sales tax revenue. It's important that all who have a physical presence in Texas, from the local store on the corner to the large conglomerate, have the same level playing field."

The Texas case is one of several being pressed by multiple states seeking sales tax revenue from online purchases made within their jurisdictions. In 2009, Amazon cut ties with affiliates in Rhode Island, North Carolina and Hawaii over the issue of unpaid sales tax, then was moved to follow suit in Colorado in 2010. North Carolina and New York have sued.

Sensing even more blood in the water than that caused by rival Borders' bankruptcy declaration, Barnes & Noble issued an invitation to all Amazon.com affiliates, or Web sites that drive traffic to Amazon.com in return for fees derived from any resulting sales. Barnes & Noble offered to cover collection and remittance of sales taxes due in order to shield the affiliates from state auditors.

The Meaning of 'Substantial'

The Council On State Taxation (COST), a nonprofit trade association consisting of over 600 multistate corporations, aims to "preserve and promote equitable and nondiscriminatory state and local taxation of multijurisdictional business entities." Joseph R. Crosby, COST's COO and senior director of policy, says COST has been working for more than 10 years with state and local governments on a federal measure that would simplify the sales tax system. But some jurisdictions, especially as their ledgers quiver and crumble, are impatient with the process and are looking at alternative avenues to getting that uncollected revenue.

New York passed a landmark law three years ago. Crosby says COST views the New York law as unconstitutional. Colorado has passed a different law with a similar aim, though a federal court has enjoined enforcement of that law for the time being. Other measures have surfaced in a number of states.

In Texas the Amazon fulfillment center and Amazon sales site could be, in effect, affiliates, assuming they have common ownership, says Crosby. "But just because they're affiliates doesn't mean you can impute nexus from one to the other."

In addition, Crosby cites other instances where companies have had fulfillment centers only fulfill orders from out of state, in order to avoid sales tax. "If a center in Kentucky doesn't fill orders from Kentucky, what is the constitutional connection if they don't do anything else there?"

At issue is the Commerce Clause in the U.S. Constitution, and two questions emanating from the slew of legal cases involving nexus, says Crosby: "What is the extent of state tax jurisdiction? And is there substantial nexus?"

The political ramifications are many, says Crosby: First, Congress is going to be slow to pass any streamlined sales tax measure, however much sense it might make for all concerned, when it outwardly appears to be a tax hike. Second, Richard Prem, Amazon.com's vice president for indirect taxes & tax reporting, sits on the COST board. So does a tax leader from the biggest brick-and-mortar retailer of all, Wal-Mart. Others are COST members.

"There are other large retailers who would like to see states collect from Amazon," says Crosby.

He sizes up the Texas effort with a Texas-type football metaphor.

"This is an end run around the streamlining effort," he says. "I understand the frustration because it's difficult to get Congress to act on something they'll see as a tax increase, even though on Capitol Hill they are talking in favor of streamlining. But some folks are becoming frustrated with the slowness of the federal process."

Watch for an in-depth online report on this hot-button issue in March in the SiteNet Dispatch e-newsletter. Sign up now at SiteSelection.com.


Freescale Scales Up
in Mexico’s ‘Silicon Valley’

T

hough it's selling off properties in other locales, Austin-based Freescale Semiconductor is growing its engineering, business process operations and software design capabilities at its Freescale Mexico Business and Technology Center in Guadalajara. Growth at the site will be focused in multiple areas, including analog and mixed signal design, business processes, and systems and applications.

The new facility (pictured) is three times larger than Freescale's previous building in Guadalajara, and has 22,000 more sq. ft. (2,044 sq. m.) available for future expansion. The company expected to end 2010 with more than 250 employees on site, as well as 80 partners. The facility is large enough to accommodate more than 500 people with state-of-the-art laboratories for the medical, automotive, appliance and multimedia markets.

"Our Guadalajara team continues to be an outstanding contributor to the global growth of Freescale," said Henri Richard, senior vice president and chief sales and marketing officer at Freescale, in October. "It is a credit to efforts of the team that we plan to expand our growth there from both an employee and business perspective in the coming year. We also want to thank the State of Jalisco and Federal governments, which have continuously supported our efforts in Guadalajara through support and economic incentives."

"By having global companies such as Freescale build on their commitment to the region, we are strengthening our core competences in semiconductors, BPO and IT," said Jalisco Governor Emilio Gonzalez Marquez.

The metro area of 4 million people is home to approximately 57 percent of Jalisco's population, as well as to design and engineering centers from such firms as Intel, GE, IBM, Hitachi, HP, Siemens and Flextronics.

Intel's Mexico Web site explains that the city now hosts 12 global OEMs, 16 EMS providers and 24 design centers. The area is also home to the Mexico Center for Semiconductor Technology.

Freescale sited its first Latin American facility in Guadalajara in 1968.



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