How Sales Taxes Affect Customer and Firm Behavior: The Role of Search on the Internet
Published 4/1/2010
Author: Eric T. Anderson, Nathan M. Fong, Duncan I. Simester, and Catherine E. Tucker
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Executive Summary
State sales taxes can add substantially to the cost of an item. However, a multichannel retailer that does not have a warehouse, office, or retail store in a state is not required to collect sales taxes. However, when a retailer establishes its first physical presence in a state, such as a retail store, it is obligated to collect sales taxes on all Internet and catalog orders shipped to that state.
In this article, the authors analyze purchase behavior among 13,021 customers who live on either side of a border of the state in which a retailer opened its new store. The study focuses on two questions: Does collecting sales taxes have a negative impact on sales through Internet and catalog channels? Are direct retailers less likely to establish a physical presence in high-tax states?
The authors find that while Internet purchases decrease significantly (by 16%), there is no apparent effect on catalog purchases. The absence of any change in catalog purchases can be attributed to both the difficulty and the incentive to search for lower prices at competing retailers. If search is difficult because it requires access to competitors’ catalogs or if there is little incentive to search because prices are unlikely to be lower elsewhere, the tax effects are mitigated.
At the firm level, retailers that have a larger proportion of direct sales are less likely to enter a state with high sales taxes. The article concludes that current U.S. sales tax laws have significant effects on both customer and firm behavior.
Biography
Eric T. Anderson is the Hartmarx Professor of Marketing in the Kellogg School of Management at Northwestern University. He holds a PhD in Management Science from the MIT Sloan School of Management and previously held appointments at the University of Chicago Graduate School of Business and the W.E. Simon Graduate School of Business at the University of Rochester. Professor Anderson’s research interests include pricing strategy, promotion strategy, retailing, and channel management. He has conducted field experiments with numerous retailers to investigate customer price perceptions, segmented pricing strategies, long-term effects of promotions, and cross-channel effects of marketing communication. His articles have appeared in journals, such as Journal of Marketing Research, Marketing Science, Management Science, Journal of Economic Theory, Quantitative Marketing and Economics, Harvard Business Review, and Sloan Management Review.
Nathan Fong is a doctoral student in the MIT Sloan School of Management. He holds an undergraduate degree from Stanford University. His research examines consumer search behavior, including consumer reliance on cues.
Duncan Simester is NTU Professor of Management Science at MIT’s Sloan School of Management, where he holds the NTU Chair in Management Science. This article is one of a series of studies that uses field experiments or natural experiments. These include several studies that focus on evaluating the long-term effect of marketing decisions, together with a stream of work investigating the role of price cues. Duncan edits the marketing science section of Operations Research and is an area editor at Journal of Market Research, Marketing Science, and Management Science.
Catherine Tucker is Douglas Drane Career Development Professor in IT and Management and Assistant Professor of Marketing at MIT Sloan School of Management. She specializes in the influence of network effects and social interactions on technology adoption. Her empirical research helps managers overcome the “chicken-and-egg” problem that hinders new product adoption. She is also interested in how privacy concerns can change the adoption pattern of “networked” technologies. She has experience working in a variety of industries, including catalog retailing, electronic payments, electronic health records, medical information technology systems, video communications, business-to-business exchanges, business-to-consumer Internet portals, online information technology services, targeted advertising, and search advertising. She received an undergraduate degree in Politics, Philosophy, and Economics from Oxford University and a PhD in Economics from Stanford University.
Journal of Marketing Research, Volume 47, Number 2, April 2010
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