A Pair of Sneakers Can Teach About Online Sales Tax

US News

A pair of black, low-top Converse Chuck Taylor sneakers currently costs $50 on Zappos.com, tax-free in most states. On Amazon, a shopper will spend $46.69--again, tax-free in most states. Kohl's website offers a discount, with the shoes costing $44.99, but a 6 percent sales tax (a common state sales tax rate) adds on $2.70, making the shoes slightly more expensive than a pair bought on Amazon.

The Marketplace Fairness Act, passed by the Senate, aims to change that. The bill would help ensure that all of those retailers collect that tax. Currently, the law is that retailers only have to collect tax if they have a physical presence in consumers' home states.

[OPINION: Senate's Commonsense Internet Sales Tax Bill]

The bill is now up for consideration in the House. If it passes, here are the lessons that online retailers could glean from a pair of Chuck Taylors:

Taxes Really Will Send (Some) People Elsewhere

The literature on how sales tax affects consumer behavior is limited, but there is evidence that consumers do pay attention. A 2011 survey of online shoppers from market research firm Forrester Research showed that 25 percent of shoppers said they would have purchased from a different retailer if sales tax were charged, and another 39 percent answered that it "depends." That's a majority of people who are at least considering spending their money elsewhere.

Another 2009 study from the Kellogg School of Management at Northwestern University showed that when an online sales tax was imposed on consumers, Internet purchases fell by 16 percent, as buyers were able to compare before they bought.

Still, the Forrester study leaves over one-third of buyers who say they wouldn't let a tax affect their choices. Plus, brand loyalty is a formidable force. A January PwC report found that price has no impact on how consumers spend at their favorite retailers. Rather, fast delivery, products and marketing win out. In other words, die-hard Amazon fans may not blink at spending three extra dollars on a pair of Converses.

[DEBATE CLUB: Should the Senate Have Passed an Online Sales Tax?]

"If you just take Amazon as an example, they've built such a user-friendly platform that it's hard to imagine the addition of sales tax is going to change behavior," says Jack Gillis, director of public affairs at the Consumer Federation of America.

Small Competitors Will Suddenly Look Scarier

The Marketplace Fairness Act would exempt retailers with less than $1 million in out-of-state sales from collecting sales taxes. That means that if a small shoe distributor is offering tax-free Chucks, a dedicated shopper could ferret them out and get cheaper shoes, giving the smaller firm a small advantage over Zappos.

Large companies will then have to ask themselves "'Are there competitors out there that are offering the same goods, and aren't required to collect sales tax?' My view is that's what's really going to matter," says Eric Anderson, professor of marketing at the Kellogg School and coauthor of the 2009 study. "If you're a small firm, you're not going to be required to do this. So those guys are going to benefit tremendously."

Shipping and Handling Matters

A caveat to the Chuck Taylor example that we started with: the tax isn't the only cost that Kohl's adds on. They also tack on $6.95 for shipping and handling, putting the company at a further disadvantage. Even if the playing field is "leveled" by forcing Amazon to charge sales tax, Kohl's will still be at a disadvantage with its shipping costs.

[READ: The Easy Case for Online Sales Taxes]

Consumers who are price-sensitive enough to be looking at the tax added to their online shopping carts will also be looking for this other add-on...and potentially be turning away because of it.

With competition growing ever more intense in the online marketplace, then, "It is true that you have to think harder about moving towards free shipping and handling," says Anderson.

Shoes Don't Tell the Whole Story

A $2.70 tax is, perhaps, a small extra price to pay for some spiffy new kicks. But a consumer about to buy a $3,000 TV on Best Buy's website may see $180 extra in sales tax, and decide to buy from an online-only site instead. And because manufacturers often instill minimum retail prices for durable goods, says Anderson, big box stores wouldn't be able to drop prices further in order to lure customers away.

"The incentive to buy a $3,000 TV from Amazon when you don't pay tax goes way down now, because you pay tax on it but you're also going to pay tax at Best Buy," says Anderson.

In other words, sites that sell clothing and shoes may have much less reason to fear a new sales tax than sites that hawk home theaters.



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