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Texas Amazon Tax Deal Illegal?

Texas tax lawyer and former deputy state comptroller, Buck Wood, has raised concerns that the recent deal between Texas and Amazon violates the state constitution, according to statesman.com. 

In April, Texas comptroller Susan Combs  reached a deal with Amazon over sales tax collection. The online retailer agreed to 1) create at least 2,500 jobs and invest at least $200 million in capital investments in the state over the next four years; and 2) begin collecting Texas sales tax July 1, 2012.

However, Texas and Amazon did not always see eye to eye concerning sales tax collection. In 2010, Combs handed Amazon a $269 million bill for uncollected sales taxes from December 2005 to December 2009. A question about the status of this debt has stirred controversy over the legality of the recent agreement.

Amazon has made an "immaterial payment" towards the $269 million, but under Texas law they do not have to reveal the amount (and have chosen not to reveal it). Yet most tax professionals, Wood included, believe that the deal with Amazon forgave a good portion of the debt. Wood argues that forgiving tax debts is illegal according to the Texas constitution. According to statesman.com, "Combs, through her aides, said she legally cannot discuss individual cases. Speaking generally, however, she denied ever 'forgiving' taxes in violation of the constitution."

The Texas constitution denies the legislature the right to forgive ". . . in whole or in part, the indebtedness, liability or obligation of any corporation or individual, to this State . . ." (Article 3 Section 55). Furthermore the constitution states that the legislature has no power to ". . . release the inhabitants of, or property in, any county, city or town from the payment of taxes levied for State and county purposes, unless in case of great public calamity . . ." (Article 8 Section 10).

However, Texas tax code section 111.101 gives the comptroller the power to ". . . settle any claim for a tax, penalty, or interest imposed by this title if the total costs of collection, as conclusively determined by the comptroller, of the total amount due would exceed the total amount due."

Woods interprets this law literally, and argues that the cost Texas would have incurred in collecting the $269 million from Amazon would not have exceeded $269 million, and therefore, Combs has no justification to settle the claim, in this case. Yet, Combs takes a more expansive view of the law, arguing that the benefit of getting Amazon to collect Texas sales tax should count when considering the cost to the state.

For now, Comb's deal with Amazon remains intact. It remains to be seen whether a local government will challenge the settlement.

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Avalara Author
Will Frei
Avalara Author Will Frei
Will Frei covers sales tax news including best practices, legislation and sales tax technology. He is the Social Media Manager at Avalara.