"Repent, Amazon.com (Nasdaq: AMZN ) ! The end is nigh. Your tax-free reign will not stand." If corporations could wear sandwich boards and picket their rivals, that's what you'd be reading right now, as everyone from Target (NYSE: TGT ) to Wal-Mart (NYSE: WMT ) , Best Buy (NYSE: BBY ) , Home Depot (NYSE: HD ) , and Sears Holding (Nasdaq: SHLD ) strutted in front of Amazon's virtual storefront.
As the economy sputters, and states scramble to plug tax revenue gaps, a group called the Alliance for Main Street Fairness is demanding that Amazon begin collecting state sales taxes -- as the big-box retailers named above already do, and Amazon rarely does. Although originally formed to defend small "Main Street" retailers from Amazon's Internet dominance, the alliance has recently begun acquiring heavyweight allies of its own.
What's got the big-box folks in a huff? Amazon doesn't like to collect sales taxes from its customers. (Amazon says it's too confusing trying to decipher the patchwork of 50 states' tax laws. New Amazon competitor Netflix (Nasdaq: NFLX ) disagrees.)
The law is usually on Amazon's side, requiring tax collection only where the company maintains a "physical presence." Alas, states define that term loosely, giving Amazon lots of wiggle room to escape the obligation -- and lots of incentive to wiggle. In a state such as my own, for example, Amazon operates multiple warehouses, but has convinced tax collectors to "hear no evil, see no evil, tax no e-tail." As a result, almost anything I want to buy at the corner bookstore, I can just as easily buy on Amazon and have delivered to my doorstep free of charge -- and sans the 7% sales surcharge.
Cry havoc, and let loose the IRS
Now, Amazon's retail rivals are crying foul. States are starting to heed their calls for tax reform, now that their coffers are running low -- and yes, this is playing out just as I predicted last year.
So what happens next? At present, Amazon is fighting a desperate rear-guard action, litigating a New York law that attempts to force it to collect tax, cutting ties to "affiliates" in other states, where new laws define companies that promote Amazon's business as de facto "physical presences" of Amazon itself.
So far, the company is holding its own. But the writing's etched pretty clearly on the wall. Ultimately, Amazon will have to back down and pay up. Beware the downgrades when it does.
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