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Working Paper

Customer Search in Response to Sales Taxes: The Internet versus Catalogs

Eric T. Anderson, Nathan M. Fong, Duncan I. Simester, and Catherine E. Tucker, 2008 [08-118]

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State sales taxes can add substantially to the cost of an item. However, a multichannel retailer that does not have a warehouse, office, or retail store in a state does not have to collect sales taxes. But when a retailer establishes its first physical presence in a state, such as a retail store, it is obligated to collect sales taxes on all Internet and catalog orders shipped to that state.

Here, authors Anderson, Fong, Simester, and Tucker analyze purchase behavior among 13,021 customers who live on either side of a border of the “focal” state in which a retailer opened its new store. Their study focuses on two questions: Does collecting sales taxes have a negative impact on sales through Internet and catalog channels? Are direct retailers less likely to establish a physical presence in high tax states?

They find that while Internet purchases decrease significantly (by 16%), there is no apparent effect on catalog purchases. The absence of any change in catalog purchases can be attributed to both search difficulty and incentive to search for lower prices at competing retailers. If search is difficult because it requires access to competitors’ catalogs, or if there is little incentive to search because prices are unlikely to be lower elsewhere, then the tax effects are mitigated.

At the firm level they find that retailers that have a larger proportion of direct sales are less likely to enter a state with high sales taxes.

The authors conclude that current U.S. sales tax laws have significant effects on both customer and firm behavior.

About the authors
Eric T. Anderson is Associate Professor of Marketing, Kellogg Graduate School of Management, Northwestern University. Nathan M. Fong is a doctoral student, Duncan I. Simester is Professor of Management Science, and Catherine E. Tucker is Assistant Professor of Marketing, all at the MIT Sloan School of Management.

Included in the following collections:
MSI Reports 2008
Executive Director's Letter 08-004

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