Will the Tax Grinch Steal Internet Christmas?
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.
- 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