How Sales Taxes Affect Customer and Firm Behavior: The Role of Search on the Internet

Internet and Search and Advertising

Article Snapshot

Author(s)

Eric T. Anderson, Nathan M. Fong, Duncan Simester and Catherine Tucker

Source

Journal of Marketing Research, Vol. 47, No. 2, pp. 229-239, 2010

Summary

This paper explores the effects of state-level sales taxes on the business strategies of retailers.

Policy Relevance

A high sales tax reduces the likelihood that direct retailers will maintain a physical presence in a state.

Main Points

  • In the United States, retailers without a physical presence in a state do not need to pay sales taxes for goods shipped to customers in that state.
    • Retailers that do more than 70% of their business through direct channels—Internet storefronts and catalogs—operate predominantly in states with low sales taxes.
       
    • Retailers who do more business through physical stores are actually more likely to open stores in high tax states.
       
  • When an Internet retailer is obligated to collect sales taxes in a state, its sales fall by 11.6% on average; catalog retailers do not see this effect.
    • The authors explain this difference by noting that online, it is easy to search for a competing retailer that does not collect taxes. It is difficult to do the same for catalog retailers.
       
    • This explanation is supported by the fact that, when an item is heavily discounted at an online store, consumers seem indifferent to sales taxes because other online stores are unlikely to offer a better price.
       

 

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