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Everybody does it. You've probably done it. Who can blame you, in this economy? You'd be dumb not to factor sales tax into a decision to buy from Amazon (Nasdaq: AMZN ) instead of a bricks-and-mortar retailer. The savings approaches 10% in some places.
The other 1%
But we're supposed to pay sales taxes for online purchases. Yep, you're expected to track it, tally it up and send off a check. Who knew? A legislative analyst in California reports 1% of California consumers go to the trouble. (Really? They must be accountants.) The analyst estimates the other 99% owe the state $1.1 billion of uncollected sales taxes. That's more than 4% of California's $26.6 billion budget shortfall.
The good old days
When Amazon became a household word during the dot-com boom, bricks-and-mortar retailers weren't happy about Internet retailers' exemption from charging sales taxes. But the economy was booming and the Internet was beyond criticism. Bricks-and-mortar retailers' protests about unfair sales tax rules weren't as loud and fell on deaf ears.
The new new economy
Times have changed. Really changed. Bricks-and-mortar retailers are struggling, with many closing stores and some in bankruptcy. Their protests about unfair sales tax laws have gotten much louder. Sales taxes provide about one-third of states' revenue (aka, taxes). With states desperate for more revenue, retailers' protests are no longer falling on deaf ears.
The taxman cometh
Sensing an opportunity to use the state budget crisis to their advantage, large retailers are stepping up efforts to remove the Internet-only sales tax exemption. Wal-Mart (NYSE: WMT ) , Target (NYSE: TGT ) , Best Buy (NYSE: BBY ) , Home Depot (NYSE: HD ) , and Sears (NYSE: SHLD ) are working with the Alliance for Main Street Fairness to change sales-tax laws in more than a dozen states, including the first and second most populous states: California and Texas.
The alliance formed about a year ago and recently claimed a victory with a new law in Illinois requiring that Amazon collect sales taxes if it employs marketing affiliates in the state. In response, Amazon quickly dumped its roughly 9,000 marketing affiliates in Illinois. That suggests Amazon believes sales taxes do influence shopping decisions.
Think that might have been just a coincidence? Amazon pulled similar maneuvers in Hawaii, North Carolina, and Rhode Island after those states passed comparable legislation. It's challenging a similar New York law in court. Furthermore, Amazon announced in February that it would close a distribution center in Texas, where the state comptroller claims Amazon owes $269 million in sales tax because of its physical presence.
Bricks-and-mortar retailers' pleas are reaching beyond the state level. Two U.S. senators are reportedly considering legislation to force online retailers to collect sales tax. This would run against the 1992 ruling in which the U.S. Supreme Court decided that only merchants with a physical presence (e.g., stores) in a state must collect sales taxes. At the time, Internet retailers did not exist. The ruling was centered on the direct-mail industry. With its eye on that ruling, Amazon collects sales taxes in just five states: Kansas, Kentucky, New York, North Dakota, and Washington (where it's headquartered).
The not-so-bearish case
Bears might argue that Amazon can't compete without this unfair advantage. I disagree. In my experience, Amazon's pre-tax prices meet or beat competitors. A recent Wall Street Journal article that compared prices at Amazon, Target, and Wal-Mart for a camera, a TV, and a PlayStation came to the same conclusion.
There's more than one reason to shop Amazon. It has great selection and customer service. Furthermore, many consumers prefer not spending time or gas money running around shopping for something that can be delivered free of charge. Bulls could argue that while many customers would be disappointed to pay sales tax on Amazon purchases, the company wouldn't lose that much business thanks to its selection, service, and convenience.
Internet-only retailers' sales tax advantage appears to be dwindling and could disappear. Amazon is concerned enough about the possibility to spend time and money fighting it in court, suggesting they view this as a material threat.
That said, it would likely take years for a change to take place on a nationwide level. Investors would be well aware if a bill was winding its way through Congress or a case was on its way to the Supreme Court. Either could pressure the stock, but within limitations because of the uncertain outcome and plenty of time to take action.
Even if Internet-only retailers are forced to collect sales tax and Amazon's growth rate slows from the 44% analysts are projecting over the next three to five years, I'm willing to bet the company will still be the retailing winner.
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