Amazon.com Could See Price Advantage Fade With Sales Tax

June 30, 2012 — -- Q: How badly will shares of Amazon.com suffer as it must collect sales tax in more states?

Consumers knew that if they bought something from Amazon.com, they were pretty sure they'd pay 5% or more below what they pay at a local store. And the reason was simple: Amazon hasn't been required to collect sales tax on the behalf of consumers for years in nearly all states.

But this big price advantage is now eroding. Since the company is based in Washington, Amazon has always collected tax there. Rules require any retailer with a physical presence in a state, called a nexus, to collect sales tax from consumers there. It's then up to consumers in other states who purchase from Amazon to submit their own state sales taxes, which is rarely done.

But as Amazon expanded, and opened facilities in various states including Kentucky, it's had to collect sales tax there as well. Currently, Amazon collects sales tax from buyers in Kansas, Kentucky, New York, North Dakota and Washington.

But the list is about to get longer. Amazon reached a deal with the state of California to start collecting sales tax on purchases in the Golden State. More states are likely to follow with new rules that require Amazon.com to collect tax.

California will be an interesting test case for several reasons. It's one of the biggest states to require Amazon to start collecting sales tax. It's also a state with one of the highest sales tax rates, approaching 9% in most cases. Suddenly, Amazon consumers will be facing 9% higher prices than they did before.

On its face, the increase charge in sales tax will likely erode Amazon's business. Amazon will suddenly see more intense competition from the Web sites of competing retailers with physical stores. For instance, BestBuy.com will now be on equal footing as Amazon.com on electronics, since before BustBuy.com had to collect sales tax while Amazon.com did not. Furthermore, consumers who don't want to wait for their products may return to stores, since the tax benefit is gone.

The stock, though, will hinge largely on how Amazon.com reacts. Amazon had to go to great lengths to avoid having any physical presence in various states to avoid triggering the tax collection requirement. But now that it's going to be collecting sales tax in many states, the company might be able to do creative things to add value.

Amazon has already said it plans to expand its presence in California. If Amazon is able to add value while collecting sales tax, such as offering same-day delivery, or provide showrooms for consumers to try products that are hard to shop for online, Amazon could turn the negative into a positive.

But if Amazon doesn't change its strategy, in light of imposing what is essentially a 5% to 9% price hike on investors, it's more than likely to lose market share.

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Follow Matt on Twitter at: twitter.com/mattkrantz