Amazon.com Inc's agreement to start collecting sales tax in California next year may help brick and mortar rivals compete on prices 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 will not have to collect sales tax in California until September 2012, Hedlund said.

If Congress passes national online sales tax legislation before July 1, 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 do not have to collect sales tax on purchases by those residents. As e-commerce ballooned in recent years, that exemption came under pressure from several states looking to fill big budget gaps.

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 Inc, Best Buy Co Inc and Staples Inc.

The Internet is an important channel for sales now and its growth is going to compel a solution from Congress, said David French, senior vice president of government relations at the National Retail Federation.

The California deal puts Amazon and bricks and mortar retailers more on the same page, which will help with a national solution, he added.

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 hard-line 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 consumer electronics and office supply sales, 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 spokeswoman Mary Osako said: On pricing, we offer low prices whether or not we collect and remit sales tax.

She declined to comment on the California tax deal.

Amazon shares slipped 1.2 percent to close at $217.26 on Thursday.

Higher-priced items sold online, such as big-screen TVs and diamonds, will likely be affected by the collection of sales tax, said Colin Sebastian, an analyst at RW Baird.

The 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 smoke screen 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 is 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.

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 and Andre Grenon)

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