Online Retailer Outlook: A more taxing future?

By | June 9, 2011

internet shopping cartThere has been no shortage of press on Amazon’s ongoing battles with states over internet taxation.  As a quick refresher, a 1992 Supreme Court ruling delcared that states could require retailers to collect sales tax only if they have a physical presence, such as stores or headquarters, in the state where the buyer lives. 

Given this ruling pre-dated the explosion of online commerce, individual states have been testing this definition to various degrees.  In Illinois, any online retailer with affiliates in that state are required to collect an online sales tax.  Amazon fired all of its affiliates in Illinois.  Nevada and Texas are among the other states contemplating legislation that would require online retailers to begin collecting sales tax for various reasons including the presence of an Amazon distribution center in the state.

We asked consumers in our spring Compete Online Shopper Intelligence survey how a hypothetical Internet sales tax – or “Amazon tax” as it is commonly referred to – would influence online shopper buying habits.  The reality is that the impact will be felt less by the behemoth Amazon and more by the smaller retailers.

The results were quite surprising.

Close to 49% of respondents indicated that they would change their online spending habits in some way if they were required to pay an online sales tax.

how would paying sales tax on your purchases from online-only retailers impact online shopping habits

When asked why they might shift their spending from online-only retailers to offline retailers, the majority of consumers indicated that they would be more price-sensitive if online-only retailers were forced by legislation to start collecting sales tax.  Almost equally important, consumers indicated they would prefer the option to pick-up an item in-store if buying a product online no longer provided them a tax savings.

why shift spending from online-only to offline retailers 2

A few key observations:

  1. Consumers are going online and visiting retailers such as Amazon to buy a product knowing they don’t have to pay sales tax – regardless of whether the item online costs more.
  2. Consumers who are treating traditional bricks-and-mortar retailers as an “Amazon showroom” to check out products, then go home and buy them, might be apt to splurge right in the store for that next flat-screen TV as opposed to having to try and sleep for three days for that TV show up at their house.

Let’s face it, Amazon is not going away tomorrow.  An online sales tax could certainly have an impact on their bottom line.  However, the impact on smaller “mom and pop” retailers could be crushing.

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