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Taxing online sales could change buying behavior

A push by state and federal lawmakers plus online retail giant Amazon.com to collect sales tax on online purchases could help brick and mortar retailers who complain they lose sales to tax-free online competitors, provided beleaguered consumers don't view this as the last straw and stay out of stores entirely.

June’s greater-than-expected decline in retail sales indicates that Americans are increasingly reluctant to open their wallets. Likewise, the most recent Thomson Reuters/University of Michigan Surveys of Consumers showed a “sizable loss” in consumer confidence. Against this backdrop, more states are considering levying taxes on e-commerce purchases to replenish their depleted coffers. In Congress, a rare moment of bipartisan unity is advancing bills that would legislate such taxation at the federal level. 

Amazon appears to have seen the writing on the wall and is entering into deals with states on a piecemeal basis. In New Jersey, for example, the retailer agreed to start collecting taxes in July 2013, giving it one more tax-free holiday season and a hub to expand its same-day delivery service. In return, it has promised to build a pair of distribution centers that will employ 1,500 full-time people plus seasonal workers, according to a story in Monday's Wall Street Journal.

Amazon also supports federal legislation mandating state sales tax collection on online purchases, since this would take away its competitors’ pricing advantage.

“It does reduce the disparity, closes the gap a little bit,” eMarketer senior analyst Jeffrey Grau said of the advantage online taxes would confer to brick-and-mortar retailers.

He added, however, “Even with sales tax, I think there’s a price advantage online because online has lower overhead.” Shoppers also might choose to shop online because of other factors like convenience and a broader product selection, Grau said.

The impact of sales tax collection would be felt the most by a couple of big-ticket retail sectors. “Consumer electronics and computer hardware have high online sales penetration and vast competition across web-only and multichannel eBusinesses. As a result, consumers have great choice and can essentially avoid paying sales tax on these products by buying online,” Forrester Research analyst Sucharita Mulpuru wrote in a report.

If sales tax collection were to become ubiquitous among e-retailers, people might shop differently. “In many categories with strong brick-and-mortar incumbents (e.g., electronics), a minority of consumers who avoided sales tax on previous purchases say they would go back to buying in stores if the sales tax changed,” Mulpuru wrote.

In theory, a switch back to stores would benefit brick-and-mortar brands, but only if consumers are still willing to buy — and there’s no guarantee that they are. 

 

Buyer aversion to paying sales tax climbs along with the price of the item purchased, Forrester Research found, another possible reason why electronics — which tend to be pricier than other categories analyzed, like pet supplies and personal-care products — could be more affected by an expansion of tax collection.

This month’s retail sales report indicates that the electronics category is already vulnerable. Electronics and appliance stores posted a 0.8 percent drop in sales for June versus May and had one of the few year-over-year decreases among retail sectors. 

The June Thomson Reuters/University of Michigan survey found that households with incomes greater than $75,000 displayed an especially negative outlook, which could have an outsized effect on spending in general and online spending in particular. “The sharp declines among upper income households, however, may have a greater impact on the economy since their spending accounts for a large share of the total,” director Richard Curtin said in a statement.

“People that do the most cross-channel shopping tend to be more affluent,” Grau said, which could mean an increased sensitivity to tax-related price increases.

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