With many states facing large deficits and less monetary support from the Federal Government, they are now turning to the next frontier of income growth: e-commerce sales tax. This has been a long debated topic, so it is not a huge surprise that the state and retailers have come to terms with this. So with these changes, what can we expect to happen in the e-commerce industry?
There has been trepidation that e-retailers could see a drop in conversions due to charging consumers sales tax, however, according to research there is no reason to expect a change in consumer behavior. A study by comScore shows the value of shopping online:
- Comparison shopping- without ever having to leave the room, consumers are able to hit multiple retailers to find the best price on the same product or supplementary products.
- Daily specials- More and more consumers are subscribing to emails of their favorite brands to “shop” the specials. Even recently we have seen e-retailers make a business model out of the daily special.
- Mobile Advantages- Exclusive apps that provide value through the convenience of shopping any time of day from (almost) anywhere in the world
Nowhere is there mention of not paying sales tax as a value of shopping online, inferring that sales tax has little to no influence on online shoppers.
How will sales tax affect comparison shopping? No matter which e-retailer the consumer purchases from, there will always be a sales tax incurred (pending that they live in a state that mandates a sales tax). Implications to comparison shopping are annulled as the actual price of the product will still dictate the e- consumer’s decision, not the sales tax.
In comScore’s “Online Shopping Customer Experience Survey,” the survey concludes the top reasons that people abandon their digital shopping cart:
- They were not ready to purchase, but wanted to know the total cost.
- They were not ready to purchase, but wanted to save the cart for later.
- Shipping costs were more than expected.
- Order value was not large enough to get free shipping.
- Shipping and handling costs listed too late.
While during the time of the survey, taxes were not an issue, we do find that hidden costs can be a detriment to proceeding to purchase. However, one must think that most e-consumers are aware of their state’s sales tax mandate; so the effect of a surprise cost at the end of the purchase will be minimal, if it occurs at all.
This sales tax may cause higher fixed costs for the e-retailers in order to manage charging the consumers, however, in the short run, it is expected that this cost will not be filtered into the marginal cost of the products and should not drive up consumer price. This sentiment in addition to the sales tax savings not mentioned as a reason why consumers shop online and the minimal surprise that the e- consumer will be charged the sales tax, will not have a large implication on the e-consumers shopping behavior.
In the long run, we may see prices of e-retailers increase if the cost of managing sales tax across states becomes onerous. If the e-retailer is also brick and mortar, we would expect the price of the goods in the B&M to rise to the same level as the e-commerce store, in order to stabilize prices between the two. In this instance, we would not see a shift of e-consumers turning into B&M consumers.
E-retailers that are also B&M have incentive to filter more sales through the website as the amount of fixed costs of running the e-commerce store is much less than the B&M. These types of retailers also have more incentive to keep e-commerce inventory prices equal as many people use online as a comparison shopping tool. In the event of any of these scenarios, it is unlikely that there will be a shift from e-commerce to B&M.
In light of the sales tax being mandated by more and more states, e-retailers should focus even more so on their core capabilities or value proposition. For example, if you’re an e-retailer that’s largest value is selling affordable work out gear, make sure that you are strongly conveying that message to all current and potential consumers. This message should be apparent across all media touch points that a retailer has with their consumers. As long as consumers still feel the e-retailers value is greater than the marginal cost of the sales tax plus the purchase price, the consumer will not abandon their purchase based on having to pay a sales tax.