Thursday, August 03, 2006

online sales tax

A recent working paper written by Glenn Ellison and Sara Ellison at MIT researches the effects of sales tax and geographical location on e-retail stores. Most notably, it’s important that you have an understanding of “bounded rationality.” I believe that many consumers fall into boundedly rational behavior because while they do seek to gauge the lowest price (rational behavior), they don’t always pick the lowest price (not rational).

The Ellisons in their research think of some very good reasons as to why, in the end, many consumers from e-retail sites don’t always pick the store with the lowest price. One reason, striking true with me, is that consumers may pick a retailer within the state they inhabit as well in order to receive an item quicker for the cheaper “ground” shipping. The reason why this fell out of rationale was because in doing so, the consumers would pay the sales tax of their state.

Also, another reason, they say Brynjolfsson and Smith’ (2001) paper “finds strong evidence that consumers prefer branded e-retailers over lesser known firms.” So, even though they’re not based completely on price (you’d think non-rationale), consumers are actually acting in their own best interest. I always cite Thomas Hawk for a perfect example of what can happen to a consumer.

The paper did bring up another good point. The Internet Tax Nondiscrimination Act that is set to expire in 2007 may hinder e-commerce sales. Even if it was to expire, and therefore you’d always get charged with sales tax when making an online purchase, I still believe that the e-commerce will still prove to be very powerful. For example, even the paper sites Brown and Goolsbee (2001) who, “find that in the mid 1990’s term life insurance rates dropped more for demographic groups whose members were more likely to have Internet access.” A finding that Freakonomics mentioned.

Do you think sales tax on the net would hinder you from making a purchase?

**Update: A commenter notified me of a mistake I made. They are exactly correct; the moratorium is an access issue. My insinuation on its effect to sales tax was an error on my part.

I also believe they are correct that some type of legislation being passed for taxes on online purchases across state lines would not or will not pass in congress.
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