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Repent,! The End Is Nigh.

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"Repent, (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.

And make sure you're in the loop when it happens. Add to your Watchlist.

Fool contributor Rich Smith does not own shares of -- nor is he short -- any company named above. The Motley Fool's disclosure policy has no physical presence, yet remains omnipresent.

Best Buy, Home Depot, and Wal-Mart are Motley Fool Inside Value recommendations., Best Buy, and Netflix are Motley Fool Stock Advisor picks. Wal-Mart is a Motley Fool Global Gains selection. Motley Fool Options has recommended a diagonal call position on Wal-Mart. The Fool owns shares of Best Buy and Wal-Mart.

Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Read/Post Comments (4) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 17, 2011, at 4:18 PM, purman19 wrote:

    What does the IRS have to do with state sales taxes? Absolutely nothing.

  • Report this Comment On March 17, 2011, at 6:24 PM, TMFDitty wrote:

    As a matter of fact, federal legislation *is* being considered as one way to smooth out the tax vagaries Amazon complains of, which could bring the IRS into play.

    But really, I wrote "IRS" because it's less cumbersome than writing "The Department of Revenue for Rhode Island and Providence Plantations," for example. And I suspect most people realize that.


  • Report this Comment On March 19, 2011, at 11:34 PM, IzzyLizzy wrote:

    So there's one house in the neighborhood not being robbed and so it prospers. Instead of the neighborhood watch crying "stop robbing us too" it cries "please rob all of us". Pathetic!

  • Report this Comment On April 26, 2011, at 11:40 PM, ndak27 wrote:

    You know what's odd...Amazon it's too hard to collect sales tax in 50 states. The problem with that is that they do a darn good job of it by hosting Targets website (scroll to the bottom of is run by Amazon...which collects those taxes).


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