Why an Online-Sales Tax May Not Help Brick-and-Mortar Retailers After All

National Journal

Some 300 years ago, Russian monarch Peter the Great had a problem. He wanted to modernize his country and that meant getting men to ditch their beards—a backward and unclean symbol in his mind. So he did what many leaders do when they want their citizens to change their ways: He instituted a tax.

Taxes are all about changing behavior, and the proposed Senate bill to enforce online-sales taxes is no different. Peter the Great’s tax was intended to encourage shaving. The Senate effort operates on a similar principle: It seeks to encourage more consumers to shop at brick-and-mortar stores instead of online retailers. The beard tax ultimately failed to change behavior. And it’s not clear that the online-sales tax will achieve its behavioral goal either.

The online-sales tax effort is not about choosing one industry over the other, its proponents argue. In fact, it seeks to do the opposite: eliminate what some say is an unfair advantage given to online retailers, who have not had to collect state sales taxes for online purchases. It’s not about giving physical retailers more customers, but rather about correcting for an unfair imbalance. That may be true, but the movement is still about changing how consumers behave.

"Thousands of local businesses are forced to do business at a competitive disadvantage because they have to collect sales and use taxes and remote sellers do not, which in some states can mean a 5 to 10 percent price advantage,” one of the cosponsors of the bill, Sen. Michael Enzi, R-Wyo., said in a March floor statement. Eliminate that price advantage and all those local businesses might see more customers.

Charging state sales taxes on Internet purchases will no doubt narrow the price gap between online and brick-and-mortar retailers, but it won’t necessarily eliminate it. Online sellers such as Amazon have a serious advantage: lower overhead costs. They can set up fewer, bigger buildings in places where land is cheap, they don’t need big parking lots for customers’ cars, and they don’t need as many customer-service employees. In fact, retailers even compete with their own websites for sales. And the price gap persists even in states that have already passed laws forcing online retailers to collect sales taxes. At least one study has shown that Amazon maintains a price advantage over some big-box retailers even in states where it collects the state sales tax; enforcing state taxes won't eliminate the online advantage.

Recent research also suggests that the very behavior retailers hope the proposal will curb may be a myth. The retail lobby insists that imposing sales taxes online will put an end to “showrooming,” a practice in which consumers use physical stores to browse and online stores to purchase. But a January report from PricewaterhouseCoopers suggests that showrooming not only may not exist, but that consumers in fact seem to act in the opposite way. They found that 23 percent of online consumers—in a survey of more than 10,000—researched consumer electronics online and then bought products in-store, while only 2 percent did the opposite. Shoppers were attracted by the ability to get products immediately and to see and try them in the store, the report’s authors write.

“We also can’t emphasize enough that the physical store remains the centerpiece of the purchase journey for many categories,” they added. “In nine out of 11 categories, in fact, the majority of consumers use physical stores for both researching and purchasing the products they want to buy.”

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In other words, the very behavior retailers hope the Senate bill and new online taxes will correct may not even be that pronounced.

Other research also suggests that sales taxes may not play a big role in online purchases anyway. In a late 2011 report, advisory firm Forrester Research commissioned a survey looking into how influential sales taxes are in purchasing decisions. They found that about three-fourths of the 34,000 respondents hadn't considered sales taxes when buying online. Only 8 percent of those surveyed cited the lack of a sales tax online as a priority in their purchasing decision. And Web retailers may not even pass on the full cost of taxes to consumers, thus negating the narrowed price gap real-world retailers hope for, the report suggests. Many shoppers were online not because of the sales tax advantage, but in spite of it.

There’s no doubt that the sales-tax bill will achieve one of its goals: raising billions in revenue for states. But whether it will help retailers regain customers lost to the Web is another question altogether.

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