By Alistair Barr
SAN FRANCISCO (Reuters) - Amazon.com Inc's agreement to start collecting sales tax in California next year may help brick and mortar rivals compete better on price with the world's largest Internet retailer.
In a meeting on Wednesday of Amazon representatives, members of the state legislature and the California Retailers Association, the parties reached a "handshake" agreement on the issue, according to Mark Hedlund, a spokesman for Senate President Pro Tem Darrell Steinberg.
Amazon will drop its effort to overturn a law passed earlier this year that required the company to collect sales tax starting in July. In return, Amazon won't have to collect sales tax in California until September 2012, Hedlund said.
If Congress passes national online sales tax legislation before September 2012, that law will supersede the California agreement. The handshake agreement is being written as an amendment to the state law and the changes still have to be voted on, hopefully this week, Hedlund said.
Online retailers without a physical presence in a state don't have to collect sales tax on purchases by those residents. As e-commerce has ballooned in recent years, that exemption has come under pressure from several states looking to fill big budget holes.
Brick and mortar retailers have been pushing hard behind the scenes to get Amazon to collect sales tax. The pact struck Wednesday is a victory for companies such as Wal-Mart Stores, Best Buy and Staples.
"The bottom line is that a potential agreement is a positive for brick and mortar retailers as it will level the sales tax playing field in a critical state in less than 12 months time, and may become the model applied nationwide," Gary Balter, an analyst at Credit Suisse, wrote in a note to investors on Thursday.
In the hardline retail sector, the biggest beneficiaries will be categories that are most price sensitive and where Internet penetration is above the average of 7 percent, the analyst added.
E-commerce accounts for more than 20 percent of sales of consumer electronics and office supplies, according to Balter.
"However, Amazon and other Internet retailers are making serious inroads in Pet Supply, Home Improvement and other categories and this agreement may slow that down," the analyst added.
Amazon shares slipped 1.2 percent to close at $217.26 on Thursday.
Higher-priced items sold online, like big-screen TVs and diamonds, will likely be impacted by the collection of sales tax, said Colin Sebastian, an analyst at RW Baird.
Shares of Blue Nile, which sells diamonds and jewelry online, declined 2.3 percent to close at $36.74 on Thursday.
Still, Sebastian said the online sales tax issue looks more like a "smokescreen" for bigger problems faced by brick and mortar retailers.
Scott Tilghman, an analyst Caris & Company, reckons most consumers shop online for convenience and selection rather than to avoid sales tax.
"There are marginal customers that do make purchases online for that reason, but my sense in talking to a broad range of people is that group is a very small minority," he told Reuters.
There is a perception that online offerings are cheaper, but that's not always the case, Tilghman added.
In cases where products are cheaper online, the price advantage may shrink once sales tax is imposed but it will still exist, the analyst argued.
"Pricing transparency through apps and comparison shopping websites is more likely to pressure brick and mortar than sales tax collection is to help it," the analyst concluded.
(Reporting by Alistair Barr, Dhanya Skariachan and Jim Christie; Editing by Gary Hill)