The sub­ject of taxes is in the news every day as the weak econ­omy and lost home val­ues threaten state and local gov­ern­ment with bank­rupt­cies and bud­get short­falls.  When it comes to sales tax, cur­rently 45 states require retail­ers to col­lect any­where from 2.9% to 12.7% in state and local taxes if they have head­quar­ters, stores or dis­tri­b­u­tion in that par­tic­u­lar state.  For over 10 years, “Pure Play” Inter­net retail­ers who solely sell online have been immune to these state tax col­lec­tion rules if they locate their head­quar­ters and dis­tri­b­u­tion facil­i­ties in low or no sales tax states.  The tax bur­den then fell to con­sumers who were required to sub­mit tax pay­ments on out-of-state online pur­chases with their income tax returns, yet few ever did.  On Sep­tem­ber 15th Cal­i­for­nia leg­is­la­tors joined 5 other states in requir­ing these Pure Play retail­ers (those who did not charge ship­ments to Cal­i­for­nia cus­tomers) to start col­lect­ing tax.

The hyper­bole around tax­a­tion is plen­ti­ful.  Offline busi­nesses, or “Brick and Mor­tar” busi­ness own­ers who have long been required to charge sales tax, argue that the Pure Play online retail­ers have gone too long with an unfair pric­ing advan­tage.  State and local gov­ern­ment says that lack of sales tax col­lec­tion from online sales threat­ens impor­tant pro­grams.  On the other hand, online retail­ers claim that they have addi­tional ship­ping expenses which make up for the sales tax advan­tage.  Every­one seems to have a dif­fer­ent opin­ion of what will hap­pen to gross tax receipts, con­sumer shop­ping pref­er­ences and the future of eCom­merce.  Analy­sis on the impact of tax rule changes has been lim­ited to sur­vey research which asked cus­tomers to indi­cate what they will do or have done in response to sales tax changes in states like Texas which cur­rently requires Pure Play retail­ers to charge sales tax.  Mean­while 5 more states are set to join Cal­i­for­nia in the next few years while the US Con­gress debates a fed­eral Inter­net tax.

Adobe is in a unique posi­tion to pro­vide actual data based on nearly 2 mil­lion vis­i­tors to 100 online retail web­sites split evenly between Pure Play and Click and Mor­tar retail­ers.  Analy­sis of year-over-year and month of Sep­tem­ber data for shop­pers from Cal­i­for­nia only yielded some sur­pris­ing results.

Sales at Pure Play retail­ers shows a clear rev­enue yield (revenue/visitor) spike lead­ing up to the 15th of Sep­tem­ber when the required tax rates when into effect, and a drop in rev­enue yield directly after­wards, debunk­ing the notion that this tax­a­tion had no impact on Pure Play rev­enues.  Peel­ing back the onion on the sales spike before the 15th, the increase in rev­enue came from higher con­ver­sion rates, mean­ing that cus­tomers who shopped were more will­ing to buy than usual, no doubt moti­vated by the impend­ing tax deadline.

Pure Play Graph

Cap­tion: Pure Play Retail­ers saw a 30% increase in yield prior to the tax and a 10% decline after.


Where did the rev­enue after Sep­tem­ber 15th go?  Not to Click and Mor­tar online retail­ers.  Their pre/post Sep­tem­ber 15th data remained unchanged.

Cal­i­for­nia leg­is­la­tors hope that the incre­men­tal rev­enue lost by Pure Play retail­ers shows up in the cof­fers of local stores.  Of course it is always pos­si­ble that the selec­tion and vari­ety avail­able online isn’t avail­able locally, leav­ing cus­tomers to do what they’ve done more and more of in the past few years, spend less.

We’ll keep an eye on how these changes impact Christ­mas hol­i­day spend­ing.  In the mean­time, you can access more find­ings like this for free via Dig­i­tal Index.

For a copy of this data analy­sis, click here.  Fol­low me on Twit­ter @tamarag