Amazon warns California on tax

California may decide to tax online sales, which could make it more difficult for e-commerce companies like Amazon (AMZN) to keep customers in the state. One of Amazon's key competitive weapons against stores would disappear.

According to The Wall Street Journal, "Amazon sent a letter to California legislators on Monday threatening to end its business with marketing affiliates in the state."

Amazon probably won't follow through on the threat, even if it has to collect state taxes. Its affiliates in California probably bring it as much or more revenue than its relationships with similar companies in any other state.

Amazon is also facing the risk of retaliation. California's large pension funds might decide to threaten to sell Amazon shares if the company pushes the state too hard on the tax issue. California is running a multi-billion deficit and needs all of the tax revenue it can find.

Amazon's letter is a bluff. It knows it has much more to lose than it can win by severing relationships in the state. The California legislature knows that.

Douglas A. McIntyre is an editor at VSInvestor.

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