Amazon Loses Tax Battle With Japan

In the ongoing and rapidly excalating Internet tax war, Japan's is the first government to win back-payment from Amazon.com(AMZN Quote).

Japan has been seeking $119 million in back taxes over three years, from 2005 through 2008, the Asahi newspaper reported on Sunday.

Amazon asked officials in the United States and Japan to reevaluate the bilateral tax code, but ultimately the Tokyo Regional Taxation Bureau ruled that Amazon's operations in Japan should be considered as having a "permanent establishment." As a result, it found that the company's income should be taxed in Japan under the U.S.-Japan tax treaty.

U.S. companies that conduct business in Japan without branch offices aren't required to file tax returns or pay taxes to the Japanese government.

Amazon Japan and Amazon Japan Logistics manage sales, merchandise distribution and logistics operations in Japan, but book sales from its business in the country back in the United States where it paid taxes, Asahi said.

Amazon, along with competitors like Blue Nile(NILE Quote) and Overtstock.com(OSTK Quote), have been battling with local states that are threatening to collect sales tax.

The e-retailers have ended affiliate programs in North Carolina and Rhode Island. California and Hawaii are also entangled in the debate.

Japan's move may set precedent for these other states to also demand back taxes.