Will out-of-state online retailers lose scads of business if states get the power to force them to collect sales taxes?

Jeffrey Hoopes

Jeffrey Hoopes Jeffrey Hoopes, Auditors

While it’s not spoken about much in the currently re-energized debate about whether states should be able to gobble up sales taxes from online sellers, worries about the answer to the question are undoubtedly bubbling under the surface of the retail industry.

Discussion of the issue has recently been gaining momentum. In March, two events – the introduction of the Marketplace Fairness Act in the United States Senate and an opinion written by Supreme Court Justice Anthony Kennedy — made it more likely than it has been in 50 years that out-of-state retailers will have to collect taxes in states where they don’t have a physical presence.

Common sense would appear to dictate that if that happens, online retailers would lose their advantage over the brick-and-mortar businesses that already must charge their customers sales tax. Yet the evidence is inconclusive that “people buy less stuff when they’re faced with sales taxes,” in the words of Jeffrey Hoopes, an Ohio State University assistant professor of accounting and management information systems.

In a paper published online last year, Hoopes and two University of Washington co-authors, Jacob R. Thornock and Braden M. Williams, conclude, in fact, that “the magnitude of the revenue effect of sales tax avoidance is somewhat disputed, which makes it unclear to what extent e-tailers may have a competitive advantage due to sales taxes.”

Yet however consumers perceive the current lack of tax collection by online vendors, “the stock market sees it as an advantage,” Hoopes said recently, and thus investors want to pay “a little bit less for a company if that advantage isn’t there.”

As part of their research, the authors of the paper looked at stock market returns and analysts’ sales forecast revisions in the face of legislative activity involving the Marketplace Fairness Act and similar bills that could erode the “alleged competitive advantage for e-tailers.”

Following indications that federal sales tax legislation was on the move, the share prices of e-tailers drop compared with those of traditional retail firms and “analysts forecast a future reduction in sales revenue for e-tailers,” the researchers found. “These findings imply the existence of a competitive advantage for e-tailers, which will potentially diminish with the enactment of federal sales tax legislation.”

Not too long ago, the competition to lure retail customers was mainly based on such factors as price, customer service, convenience, and location, according to the authors.

“Now, with the click of a button, nearly anyone in the United States can have virtually any item shipped to their door in a matter of days or even hours. Moreover, their purchase is often free from sales tax,” they write. “Thus, with the rise of the internet, sales taxes have arisen as an additional potential competitive factor.”

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