Amazon.com's (Nasdaq: AMZN) constant bickering with a number of state governments over sales-tax issues has the online retailer's affiliates in some states slowly warming up to its competitors. That could be a long-term issue for both Amazon and its investors.
The legal argument
Without drifting too far into complex tax laws, Amazon says having affiliates in a given state doesn't give the retailer a "physical presence" in that state and therefore doesn't allow states to force Amazon to collect sales taxes.
State governments, on the other hand, find themselves in a bit of a bind. While higher budget deficits have forced the state governments to adopt measures demanding Internet retailers like Amazon to collect sales taxes on their behalf, Amazon says the move would push up prices, leading to a loss of online buyers.
The competitive advantage
Amazon says it is not bound by law to collect taxes on states' behalf. Late last month, Amazon threatened to exit the state of California if a sales tax law goes forward -- a move that likely puts the fate of its more than 10,000 affiliates in the state in jeopardy. In order to show that it means business, the company has officially ended affiliate programs in Hawaii, North Carolina, and Rhode Island, all of which passed legislation mandating collection of sales tax by e-retailers. Amazon also filed a suit against the state of Texas after state authorities claimed that the company owed the state government $269 million in uncollected sales taxes from 2005 to 2009.
Amazon may or may not wind up needing to cough up state sales tax revenue -- it's fairly amazing that it's gone this long without needing to do so. If it does, then the higher prices that result could threaten profit margins, which would likely reduce the company's bottom line and therefore the share price -- at least in the short term. Unless Amazon can make up for the difference in sheer volume, we're looking at some fairly significant short- and medium-term headwinds if taxes are enforced.
Who's wooing the jilted
Competitors Barnes & Noble (NYSE: BKS)and Wal-Mart (NYSE: WMT) have been quick to sense an opportunity. Barnes & Noble, which has a strong network of more than 13,000 affiliates, issued a public offer to those affiliates that stand to suffer if Amazon goes ahead with its plan to pull out of the states. Ever the savvy operator, retail giant Wal-Mart has welcomed states' decision to levy taxes on all online retailers and has invited Amazon and Overstock.com (Nasdaq: OSTK) affiliates to come under its wings.
Another player trying to cash in on the feud between Amazon and the state governments is Sears Holdings (Nasdaq: SHLD). With more than 6,500 affiliates under its network, Sears is in the race to woo jilted Amazon affiliates. Other retailers are expected to follow suit.
The Foolish bottom line
Even if it loses its sales tax advantage, Amazon still has an upper hand over its bricks-and-mortar competitors. Amazon's online shopping forum enjoys enviable low-cost benefits that the retailer passes on to its customers. Savings from not having to collect sales tax for state governments has put Amazon in a formidable market position, but having to collect sales tax wouldn't disrupt the company's entire business model.
In the end, the customer appears to be the loser. Amazon has been instrumental in increasing affordability by helping customers avoid sales tax and thereby keeping prices lower. Even if competitors like Wal-Mart and Sears lure away affiliates, there's no escaping the additional sales tax that they have to charge their buyers. As a (price-conscious) buyer, my vote would still go to Amazon for holding the fort for effectively cheaper purchases. On the other hand, struggling bricks-and-mortar rivals have nothing to lose and much to gain from Amazon's current fight.
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