Sales Tax Reform: Offline Retailers Should Be Careful What They Wish for

  |  June 4, 2013   |  Comments

One-third of shoppers will change behavior due to new tax.

Consumers have become accustomed to "tax-free" online shopping, but the game is about to change. There is a sales tax reform bill on the floor of Congress, and whether it passes or not, increased taxes for online-only retailers are inevitable - there is too much tax revenue being missed by states under the current self-reporting system.

To investigate the potential effect of an online sales tax bill, my company surveyed 500 online shoppers. The respondents were instructed to think about their last online purchase, then asked what they would have done if state and local sales tax were charged at the time of purchase. Most consumers (63 percent) said they would have still made the purchase online, 18 percent said they would have made the purchase offline instead, and 19 percent said they would not have made the purchase at all.

This is good news for brick-and-mortar retailers in the short term, as one in five online purchasers will purchase in-store if sales tax is applied - but the story does not end there. The tax reform is the first domino leading to major changes in the retail landscape in the near future.

Naturally, the bill has wide support among major brick-and-mortar retailers, such as Walmart, Best Buy, and Target, which have long been fighting against the lower prices of the "tax-free" online-only retailers. What may be surprising is that Amazon also supports the bill. Why would the biggest online-only retailer back legislation that could curtail online buying by as much as one-third? Amazon is already a step ahead.

Without having to worry about state lines due to taxes, Amazon is able to expand its operations into all 50 states, opening up a myriad of possibilities to better serve its customers. If lack of sales tax has been an advantage of online retailers, convenience and immediacy have been the biggest advantages of brick-and-mortar stores. Amazon's recent moves and investments have driven the company closer to reaching the immediate gratification parity that customers get with physical stores. With added infrastructure across the country, Amazon will be the champion of immediacy.

The same way the standard of free shipping was once a fringe benefit, next-day and same-day delivery, as well as pick-up, will be the new normal in the near future. Amazon has already been testing same-day delivery in 10 major markets and has over 10 million people subscribing to Amazon Prime for two-day delivery.

EBay, although opposed to the tax reform, is also positioned to expand its services once state lines are no longer barriers. EBay has recently launched the eBay Now app geared toward instant delivery in New York, San Francisco, and San Jose. Through partnerships with over a dozen major retailers including Best Buy, Target, and Macy's, an eBay "valet" will find what you need at a nearby store and deliver it to you for a small delivery charge. EBay plans to expand service to Chicago or Dallas next and, if all goes well with the pilot, across U.S. cities this summer.

Moves like those taken by Amazon and eBay deliver a greater threat to brick-and-mortar stores than lopsided taxation. Once online-only retailers build out and perfect these same-day services, the brick-and-mortar stores will have to innovate to stay relevant. The next five years could see a retailer arms race, where the stores giving customers the most convenience win.

Once same-day shipping becomes the norm, one of the only advantages physical stores will have left is the in-store shopping experience. Customers still like to shop, and touching and feeling a product will always be a draw for brick-and-mortar stores. Retailers will have to capitalize on this advantage and put more effort and innovation into the in-store experience.

The Internet sales tax legislation is inevitable, and whenever it passes, about one-third of online shoppers will change their purchase behavior. However, the real implication for brands is the long-term effect of the online-only retailers expanding their operations and competing with the old guard on their own turf.

For brick-and-mortar retailers relying on an Internet sales tax to level the playing field, they may find that consumers have taken the game to a whole new stadium. When the competition for consumer dollars moves beyond price, convenience and experience will reign supreme.

Image on home page via Shutterstock.


Steve Sherfy

Steve Sherfy is a manager on the insights team at GroupM Next. As a subject-matter expert for local advertising, mobile search and digital audio, Steve consults media planning teams within GroupM’s media communications and planning agencies on how to integrate, structure and execute local and mobile search strategies into clients’ overarching media plans. Steve also manages the local online listings and reputation management programs for national brands to create consumer engagement and retention at the local level. In his role, Steve is tasked with providing ongoing education and industry perspective to internal and external audiences on the latest developments as consumers migrate away from desktop computing to mobile, smartphone and tablet devices that provide online access virtually anywhere.

Steve brings 10 years of client-side and agency marketing experience to his role at GroupM Next. In addition to having run his own marketing firm specializing in helping local SMBs achieve results in the local online space, Steve has experience in the retail, healthcare and telecommunications industries. Steve has also provided insights at various industry conferences including BIA/Kelsey and SES conferences.

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