As direct marketers know all too well, the obligation to collect taxes from Internet and catalog sales depends on whether a retailer has a “physical presence” in a customer’s state. Charging and collecting taxes in these “nexus” states adds an administrative burden to sellers, and more cost to each buyer’s purchase. But does it affect overall sales as well?

To find the answer, one group of researchers studied how customers of a “multichannel apparel retailer” responded when the retailer began collecting sales taxes on Internet and catalog orders after opening a physical store in one state. The analysis focused on “a sample of 13,021 customers who live on either side of a border of the ‘focal’ state in which the firm opened its new store.” Among their findings:

  • Internet sales decreased significantly (11.6 percent) in the state where the new store opened. (The researchers suggest the ease of online search prompted customers to simply shop with another merchant to avoid paying the new state tax).
  • Catalog sales to customers living in the state were unaffected. (Conversely, the difficulty of finding an alternative retailer kept catalog customers more loyal, the authors suggest.)

“The evidence that taxes lower Internet sales but not catalog sales presents retailers with a trade-off,” the researchers note. “Should they forgo the benefits of opening a store to avoid damaging Internet demand?”

One additional finding suggests that merchants are taking this tradeoff seriously: Retailers that earn a large proportion of their revenue from direct channels are avoiding opening a first store in high-tax states, the researchers report.

The customer is always frugal. Sellers with a successful Internet presence may want to weigh the effect of opening a physical store in a given state. Local customers shopping online could balk at paying a new tax—and move on.

Source: “How Sales Taxes Affect Customer and Firm Behavior: The Role of Search on the Internet,” by Eric T. Anderson, Nathan M. Fong, Duncan I. Simester and Catherine E. Tucker.