The number of safe havens for Amazon.com (Nasdaq: AMZN) affiliates is dwindling fast. Cash-strapped states are looking to the Internet retailer to help recoup their budget deficits, passing laws requiring Amazon to collect state sales taxes. The situation hasn't hit the critical stage yet, but a growing chorus now calls for the e-tailer to repent.
I'm not one of them.
Yeah, I'm the tax man
On the one hand, you have those advocating more and higher taxes. They argue that because Amazon doesn't need to collect sales taxes, it enjoys a competitive advantage over bricks-and-mortar based retailers like Best Buy (NYSE: BBY) and Barnes & Noble (NYSE: BKS), making its prices uncompetitive.
On the other hand, critics of the proposal point out that politicians are actually penalizing the small, independent entrepreneurs who use Amazon as a storefront, and who already have difficulty matching the marketing power of Best Buy or Apple. By taxing Amazon.com, these folks argue, you're not restoring an imbalance between two industry giants; you're giving one major set of corporations a huge advantage over small mom-and-pop shops.
Furthermore, because the sales taxes would apply in every state where Amazon and fellow e-tailer Overstock.com (Nasdaq: OSTK) run affiliate programs, such taxation would place both sites at a disadvantage to other online retailers that don't run affiliate programs.
In every crisis, opportunity
Some bricks-and-mortar retailers -- notably Best Buy, Barnes & Noble, Wal-Mart (NYSE: WMT), and most recently Sears Holdings (Nasdaq: SHLD) -- are attempting to make the most of this controversy. They're trying to lure to their own shops any affiliates that Amazon cuts loose. Whether that actually helps is debatable. For the affiliates, an online storefront isn't as important as a marketing partner with enough muscle to help them effectively compete against the same companies now trying to woo them.
Sears can try to attract wayward affiliates all it likes, but I don't expect the retailer to benefit from its efforts. Its flagging sales have little to do with Amazon's tax advantages. The old-line retailer would do better by investing in its stores instead of advocating more taxes on its rivals. J.C. Penney (NYSE: JCP), with a footprint that's about one quarter the size of Sears, spends more on its stores than the once-venerable retailer does.
Note also that the states won't realize any appreciably greater tax receipts by enacting these laws, since Amazon still won't pay taxes there. Instead, the e-tailer will simply close up shop, as it has done so far. But many of the small entrepreneurs who rely upon the out-of-state sales that Amazon provided will be wiped out. According to a study done by GSI Commerce last year for one retailer client, sales dropped by 10% once it had to collect sales taxes. So you can't imagine many of the affiliates holding much good will toward Sears for ruining their platform, since a Sears' storefront isn't exactly an even trade-off.
You can run...
...but Amazon is running out of places to hide. If every state in the nation makes Amazon pay sales tax, you'll see an end to the affiliate program altogether. It'll be a speed bump for Amazon, for sure, but with affiliates accounting for less than 10% of Amazon's revenue, the hit won't be debilitating -- for the company, at least.
The initial reaction of the market, though, might not be so considerate, and shares could get sold off hard. That might create a great opportunity to pick up Amazon's shares.
You can stay on top of what Amazon's doing, and how its rivals are maneuvering, by adding the stock to the Fool's free portfolio tracker.
