Amazon.com Could Profit if Forced to Collect Sales Tax

As states face growing budget deficits, momentum is growing to force online retailers to collect taxes from purchases made by the states' residents. A 1992 Supreme Court decision said that online retailers are not required to pay sales taxes in states that they do not have a physical presence. However, as online retailing continues to grab market share from local retailers, states are losing billions of dollars in tax revenue to online retailers like Amazon.com AMZN and eBay EBAY. Local retailers are also pushing for change because they are unable to compete with online retailers' low prices. Because they don't have to pay sales taxes, companies like Amazon.com and Blue Nile NILE can lower their prices slightly below local prices and still enjoy a much higher profit margin. States also lose out because as sales shift online and out of the state, so do jobs and the revenue they bring to state budgets. States and local retailers have taken their case to the United States Congress, which has the right to regulate interstate commerce. They are pressing for changes to current laws that allow online retailers to avoid paying taxes. After years of fighting states' attempts to make the online retailer collect sales taxes, Amazon.com is supporting efforts to get Congress to pass legislation that would force online retailers like Amazon to pay taxes. Although the move might seem altruistic on Amazon's part, smaller online retailers feel that the motive behind Amazon's change of heart is simple greed. If online retailers are made to pay local sales taxes, they will have to be in compliance with dozens of different state tax laws. Although this won't be difficult for large online businesses like Amazon.com and eBay, it could be a nightmare for small online retailers. By backing the call for online retailers to pay taxes, Amazon.com might just be trying to get rid of its smaller online competitors and prevent new ones from entering the market. It's worth noting that Amazon.com isn't just an online retailer but that it also sells services to other businesses, such as letting them use the Amazon's platform. Amazon.com said that it's willing to help small online retailers deal with the tax issues by "collecting sales tax for them". No doubt, Amazon would keep a portion of all the taxes that it collected. ACTION ITEMS:

Bullish:
Traders who believe that Amazon.com is going to be the eventual winner if online retailers start paying sales taxes might want to consider the following trades:

• Buying Amazon.com (AMZN) stock might be a good contrarian move if the stock dips after a law is passed requiring online retailers to pay state sales taxes. The move could see Amazon.com getting a bigger slice of online spending and could be a boost for its services business.

Bearish:
Traders who believe that a law that makes online retailers pay sales tax will hurt their profit margins may consider alternate positions:

• Stocks like Blue Nile (NILE) and PetMed Express PETS are not as well placed as Amazon.com is if they are forced to start paying state sales taxes. Shorting these stocks could be profitable if they are soon paying sales taxes just like their brick and mortar competitors.

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