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Rivals to Allies: Is Amazon the Secret Bidder for Borders? (AMZN, BKS)

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May 16, 2011 3:42 pm
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As Chapter 11 bankruptcy proceedings forge ahead for Borders bookstore, a potential bidder for 225 of the brick and mortar stores has emerged – and it very well may be Amazon.com (NASDAQ: AMZN).

While talks remain private, sources have revealed that Barnes and Noble (NYSE: BKS) recently put in an offer to purchase ten Borders locations. It is extremely unlikely that Barnes and Noble could purchase 225 Borders locations given its own current financial woes – in fact, it is basically impossible.

So that leaves just one question. Who has the cash and the potential motivation to purchase a large number of Borders stores?

Amazon has both.

While Amazon has been one of the main causes (and benefactors) of the decline of the “brick and mortar” bookstore model, there are whispers that the online retailer may be looking to gain some exposure to the space.

Amazon, which is based in Seattle, has long enjoyed the status as a non-taxing entity, as the company is protected by a 1992 Supreme Court Ruling (Quill Corporation vs. North Dakota), which prohibits states from forcing a business to collect sales taxes unless it has physical stores in that state. That ruling has allowed for the online retailer to offer its products at much lower prices to its customers than most physical stores.

That tax-advantaged status may be coming to end, however. Cash-strapped states are currently looking to alter the laws applying to e-commerce sites by expanding the definition of “physical presence.” Such an event would be a major blow to Amazon’s business model.

As it stands, Amazon.com collects sales tax in five states (where the company has stores or offices) – Kansas, Kentucky, New York, North Dakota, Washington.

Tennessee, South Carolina, Nevada, Colorado, Arkansas, Illinois, Vermont, Texas, California, Hawaii, Rhode Island, North Carolina, South Dakota, Connecticut, Massachusetts, New Mexico, Missouri, and Minnesota legislatures are all currently working on proposals that would force Amazon and other sites to charge a sales tax to their customers.

In the past, Amazon has always stated that it would simply end contact with affiliates in states that imposed such policies.

At a recent conference, Amazon.com CEO Jeff Bezos stated, “We will continue to drop states who pass those affiliate laws, from the affiliate program. In the U.S., the Constitution prohibits states from interfering in interstate commerce, and there was a Supreme Court case decades ago that clarified that mail-order companies, because the Internet didn’t exist then, would not be required to collect sales tax in states where they didn’t have what’s called a nexus.”

Such a strategy will not be a viable solution, however, if a majority of states adopt such legislation. Amazon would simply run out of places to do business.

If (and when) Amazon loses this tax battle, having physical stores would allow the company to have a greater presence in cities nationwide – something its customers have been clamoring for. If prices are comparable, consumers statistically prefer to purchase items at physical locations, as they can see and test products in person. The ability to return and exchange items easily is another added advantage.

Another benefit Amazon would receive by purchasing Borders would be gaining access to the 41 million Borders Reward Loyalty Program members currently enrolled. Access to such a large number of customers would immediately begin to reap benefits for the online retailer, as an expanding customer base translates to expanding revenue.

A purchase of Borders stores by Amazon makes sense in a lot of ways. Do not be surprised if when the mystery bidder for the 225 Borders stores is revealed in the coming days, it is none other than Amazon.com. Time will tell.

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