How Sales Taxes Affect Customer and Firm Behavior: The Role of Search on the Internet

31 Pages Posted: 16 May 2007 Last revised: 25 Feb 2015

See all articles by Eric Anderson

Eric Anderson

Northwestern University - Department of Marketing

Nathan M. Fong

Temple University - Department of Marketing and Supply Chain Management; MIT Sloan School of Management

Duncan Simester

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Catherine E. Tucker

Massachusetts Institute of Technology (MIT) - Management Science (MS)

Date Written: January 2009

Abstract

When a multi-channel retailer opens its first retail store in a state, the firm is obligated to collect sales taxes on all Internet and catalog orders shipped to that state. In this paper, we assess how opening a store affects Internet and catalog demand. We analyze purchase behavior among customers who live far from the retail store but who are obligated to pay sales taxes on catalog and Internet purchases. A comparable group of customers in a neighboring state serves as a control. We show that Internet sales decrease significantly, but catalog sales are unaffected. Further investigation indicates that the difference in these outcomes is partly attributable to the ease with which customers can search for lower prices at competing retailers. We extend the analysis to a panel of multi-channel firms and show that retailers who earn a large proportion of their revenue from direct channels avoid opening a first store in high-tax states. We conclude that current U.S. sales taxes laws have significant effects on both customer and firm behavior.

Keywords: Sales Taxes

JEL Classification: H2, L5

Suggested Citation

Anderson, Eric and Fong, Nathan M. and Simester, Duncan and Tucker, Catherine E., How Sales Taxes Affect Customer and Firm Behavior: The Role of Search on the Internet (January 2009). Available at SSRN: https://ssrn.com/abstract=986847 or http://dx.doi.org/10.2139/ssrn.986847

Eric Anderson

Northwestern University - Department of Marketing ( email )

Kellogg School of Management
2001 Sheridan Rd.
Evanston, IL 60208
United States

Nathan M. Fong

Temple University - Department of Marketing and Supply Chain Management ( email )

Philadelphia, PA 19122
United States

HOME PAGE: http://sites.google.com/site/nmfong/

MIT Sloan School of Management ( email )

Cambridge, MA
United States

Duncan Simester (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

Management Science
Cambridge, MA 02142
United States
617-258-0679 (Phone)
617-258-7597 (Fax)

Catherine E. Tucker

Massachusetts Institute of Technology (MIT) - Management Science (MS) ( email )

100 Main St
E62-536
Cambridge, MA 02142
United States

HOME PAGE: http://cetucker.scripts.mit.edu

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