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Amazon to Collect Sales Tax in Michigan: Will it Hit Revenues?

With budget deficits staring down most state governments, there is an ongoing drive to collect sales taxes that have been successfully avoided for nearly two decades.

Online retailers such as Amazon.comAMZN and Overstock.com OSTK were not bound by statute to collect sales taxes on behalf of the state governments, except in certain cases. So consumers gained every time they shopped online. This privilege will now be withdrawn, at least for shoppers in Michigan.

Starting Oct 1, online retailers will start collecting sales tax from customers in Michigan. This will put an end to the cost benefit that Amazon has been enjoying over brick-and-mortar retailers in the state.

What Prompted the Change?

As estimated by the state officials, $6.7 million in sales tax was paid by the online purchases in 2013, which translates to just 2.5% of the total amount yet to be paid. Therefore, state governments are now determined to make up for the lost revenues.

According to Michigan's new tax rules, online retailers have to collect 6% sales tax, only if they have "nexus", i.e., a physical presence, in the state.

Amazon already has a fulfillment center in Michigan and recently announced that it would expand the corporate office in Detroit.

Under the new law, Michigan is expected to gain $60 million annually, primarily for the school aid fund.

Outlook

Amazon has been taking various measures to avoid sales tax collection because it would increase the prices of items sold on its website. This is likely to impact results initially, as consumers will reduce purchases, until they get used to the higher prices. A significant long-term impact is unlikely, in our view.

Michigan will be the 26th U.S. state where Amazon will be collecting sales tax from customers.

Amazon currently has a Zacks Rank #3 (Hold).

Stocks that Warrant a Look

A couple of better-ranked stocks in this industry are Stamps.com Inc. STMP and Travelport Worldwide Limited TVPT . Both the stocks sport a Zacks Rank #1 (Strong Buy).

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AMAZON.COM INC (AMZN): Free Stock Analysis Report

OVERSTOCK.COM (OSTK): Free Stock Analysis Report

STAMPS.COM INC (STMP): Free Stock Analysis Report

TRAVELPORT WWD (TVPT): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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