In an effort to relieve the financial stress faced by its state and local governments, California recently decided that Amazon.com, Inc. will have to collect California sales taxes just like everybody else. Amazon deals mostly in items that are relatively price elastic in terms of demand. The sales tax can be as high as 9.75% in California. This price increase will drive demand for the majority of Amazon's products downward.
The higher costs will most certainly be passed on to the consumers, driving customers to other retailers. Amazon will take the biggest hit on big-ticket items. The sales tax represents a significant cost to California consumers. People who were content to purchase an item without actually being able to see it in person will now have less incentive to take that risk. This will drive demand up for big-box retailers, who can provide a sandbox environment for people to experiment with a product before buying it. This may explain the rumors that Amazon may soon open a brick and mortar store front.
One of Amazon's greatest advantages has been its ability to undercut the competition. As more states turn to the enforcement of sales taxes for online sales, it is doubtful that Amazon will be able to manage its prices in a way that maintains its competitive advantage as an online retailer. In order to remain viable, Amazon will need to reinvent itself as a virtual company with a more physical presence.