Consumer behavior

Consumer behavior in online shopping is affected by sales tax | USAPP 4/11/20, 9:59 am
https://blogs.lse.ac.uk/usappblog/2014/01/14/sales-tax-internet/ Page 1 of 4

Credit: Luke Dorny (Creative Commons BY NC ND)

Best Buy, or Barnes and Noble, that have stores in

Consumer behavior in online shopping is affected by sales tax
Profits from the sales tax make up a large percentage of overall
revenues in many states, making the estimated $10 billion lost each
year to tax-free internet purchases particularly concerning. Liran
Einav, Dan Knoepfle, Jonathan Levin, and Neel Sundaresan
examine just how much the presence (or lack thereof) of a sales tax
influences consumer behavior. He finds that online purchasing goes
up by 1-2 percent for each percentage point increase in the state
sales tax, and that an online sales tax does lead to a decline in
purchases.
The tax treatment of online commerce has been hotly debated. In
the United States, the current legal regime effectively makes a
sizeable fraction of online retail tax-free, at a time when there is significant pressure on state
and local governments to generate tax revenues.
In conventional retail sales, sellers must collect the applicable state and local sales tax. When a
U.S. buyer purchases from an out-of-state seller, however, the buyer’s home state cannot
compel the seller to collect sales tax. Instead, states require buyers to self-report and pay an
equivalent “use tax.” While this conceivably might amount to the same thing, use tax
compliance is extremely limited and is estimated to be only in the single digits.
Merchants are classified for
tax purchases according to
whether they have a
physical presence (known
as “nexus”) in a given state.
The 1998 Internet Tax
Nondiscrimination Act made
it explicit that Web presence
alone does not constitute
nexus, placing online
commerce in an analogous
situation to mail-order sales.
As a result, “brick and click”
retailers, such as Wal-Mart,
essentially every state must
collect sales tax on their online sales. However, smaller online retailers, such as sellers on eBay
or other e-commerce platforms, and larger Internet-only retailers, such as Newegg and
Amazon, must collect tax on relatively few of their online sales.
When the Internet was new, some argued that favorable tax treatment would facilitate the
growth of online commerce. Of course, from the perspective of states with stressed budgets,
Consumer behavior in online shopping is affected by sales tax | USAPP 4/11/20, 9:59 am
https://blogs.lse.ac.uk/usappblog/2014/01/14/sales-tax-internet/ Page 2 of 4
August 1, 2012 Online Sales Tax Hearing. Witnesses (from L to
R): Paul Misener (Amazon), Steven Bercu (BookPeople, Austin
TX), Scott Peterson (Streamlined Sales Tax Governing Board),
and Steve DelBianco (NetChoice) Credit: John D. Rockefeller IV
this translates into forgone tax revenue. Sales and use taxes on retail purchases are substantial
are the largest single component of overall state tax revenue, more than 30 percent. Estimates
suggest that the “missing” taxes on Internet sales could amount to $10 billion a year.
Current policy debates about online taxes are taking place at both the federal and state levels.
Discussions at the federal level revolve around harmonizing the varied system of state and local
taxes, with the goal of lowering the transaction costs of collecting taxes on interstate sales.
Debates at the state level have tended to involve challenges to the legal definition of nexus, as
states attempt to classify more retailers, especially Amazon, as having nexus and hence being
responsible for sales tax collection.
An unanswered question in the policy debate is how much sales taxes actually matter in
determining where and how consumers shop. Although some have argued that favorable sales
tax treatment has helped spur the growth of online commerce, others point out that sales taxes
may not be very salient to consumers and that factors such as convenience and variety could
be much more important in driving retail purchasing decisions.
In recent research, we used the data from eBay’s massive online marketplace to estimate the
importance of sales taxes. As one part of our study, we looked at tax changes that have
occurred over time at the state and local level, and examined whether (untaxed) online
purchasing by state residents increased when their applicable offline tax rate rose. We found
that for every 1 percentage point increase in state sales tax, online purchasing increases by 1 to
2 percent. For example, if a state raised its sales tax rate from 8 to 9 percent, our estimates
suggest that this would lead to an increase of 1 to 2 percent of online spending by state
residents and a likely corresponding decline in offline sales. Another interpretation of the
estimates, farther out-of-sample, is that if the law changed to require collection of home-state
sales tax on all internet purchases, internet purchasing by state residents might fall by 8-9% in a
state with a typical 5-6% sales tax.
In a second part of our
study, we investigated
exactly how much
consumers actually pay
attention to sales taxes.
Offline studies have found
that consumers tend to treat
sales taxes as a “hidden”
price and respond less to
taxes than to regular retail
prices. We used detailed
browsing data from eBay to
find hundreds of thousands
of “micro-experiments” in
which individuals clicked on
an item only to find that
there was a sales tax
collected (if they lived in the
same state as the seller) or
no tax (if they lived in a
different state). We
Consumer behavior in online shopping is affected by sales tax | USAPP 4/11/20, 9:59 am
https://blogs.lse.ac.uk/usappblog/2014/01/14/sales-tax-internet/ Page 3 of 4
compared these instances (Creative Commons BY)
to see if the tax would deter
some purchases. We do
indeed find a non-trivial decline in purchases when tax is applied, and substitution to similar
goods being sold by out-of-state sellers (where the purchase would be untaxed). However, the
tax sensitivity is perhaps only a third or even less than what we might have expected from an
equivalent increase in the retail price.
The uneven application of sales taxes also has a second potential consequence. It may help to
determine the geography of online commerce, by encouraging online shoppers to purchase
from sellers that are located in different states and by encouraging sellers to make their location
decisions to obtain favorable tax status.
To assess this, we tried to estimate the extent to which Internet consumers shop “out of state” to
avoid sales tax and how this might affect the flow of goods in online commerce. A somewhat
surprising finding is that contrary to the popular idea of “frictionless” Internet commerce, online
shoppers seem to exhibit fairly strong preferences for buying from nearby sellers and in
particular for buying from sellers within their home state. The effect is sufficiently strong that,
according to our estimates, a California seller who moved across the state border into Oregon
to reduce her tax liability on California sales might lose enough of her California sales to nearly
offset the tax benefit!
This calculation suggests that online retailers face a trade-off between locating near their
customers and locating far enough away from their customers to limit their taxes. Amazon
famously resolved this in favor of limiting taxes. Two of Amazon’s distribution centers are
located just on the Nevada side of the California/Nevada border. In fact, none were located in
California or in New York. Of course, the company’s recent agreement with California to collect
taxes has changed the calculus, and it now opened new centers in California. If the state and
local initiatives to apply sales tax across the Internet succeed, effects on retail location
decisions could prove to be transitory.
This article is based on the paper “Sales Taxes and Internet Commerce,” which appeared in the
American Economic Review, January 2014, pp. 1-26.
Please read our comments policy before commenting.
Note: This article gives the views of the author, and not the position of USApp– American
Politics and Policy, nor of the London School of Economics.
Shortened URL for this post: http://bit.ly/1kzRpAS
_________________________________________
About the authors
Consumer behavior in online shopping is affected by sales tax | USAPP 4/11/20, 9:59 am
https://blogs.lse.ac.uk/usappblog/2014/01/14/sales-tax-internet/ Page 4 of 4
January 14th, 2014 | Dan Knoepfle, Economy, Jonathan Levin, Liran Einav, Neel Sundaresan, Urban,
rural and regional policies | 0 Comments
Liran Einav – Stanford University
Liran Einav is a Professor of Economics at Stanford University. His current
research focuses on empirical work in insurance and credit markets, and his
broader interests include industrial organization, micro-economic theory, applied
econometrics.
_
Dan Knoepfle – Stanford University
Dan Knoepfle is a PhD student in the economics department at Stanford
University. His research focuses on online markets and on experimental studies of
strategic behavior. He received his undergraduate degree in economics from
Caltech in 2007.
_
Jonathan Levin- Stanford University
Jonathan Levin is Professor and Chair of the Department of Economics at
Stanford University, and Professor by courtesy in Stanford’s Graduate School of
Business. His research is in the field of industrial organization, particularly the
economics of contracting, organizations, and market design.
_
Neel Sundaresan – eBay Research Labs
Neel Sundaresan is the Senior Director at eBay Research Labs where he leads
the research team in areas like Search, Machine Learning, Big Data Science, and
Vision, among others. Prior to joining eBay he was a founder, CTO of a network
CRM company and prior to that he was a manager of the eMerging Internet
Technologies group at IBM Almaden Research Center.
This work by LSE USAPP blog is licensed under a Creative Commons Attribution-NonCommercial 3.0 Unported.
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Amazon: How to get around the Australian GST rip-off 29/6/18, 10*02 am
https://www.news.com.au/finance/business/retail/turnbulls-online-…-amazon-ripoff/news-story/a9fc27c89f4f9c8ad933c34551e463df#.48l7k Page 1 of 6
retail
JUNE 1, 2018 4:11PM
‘Turnbull’s online shopping tax punishes Aussie
consumers’: How to avoid the Amazon rip-off
AUSTRALIAN shoppers will be forced to pay insane mark-ups thanks to Amazon’s decision. But there’s a way to avoid
it.
Frank Chung
business
@franks_chung
FROM July 1, online retail giant Amazon will attempt to force Australian shoppers
to use its local website featuring a much smaller, much more expensive range of
products than its international sites — but there are plenty of ways to get around the
block.

Video Image
Amazon to stop shipping to Australia
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Amazon: How to get around the Australian GST rip-off 29/6/18, 10*02 am
https://www.news.com.au/finance/business/retail/turnbulls-online-…-amazon-ripoff/news-story/a9fc27c89f4f9c8ad933c34551e463df#.48l7k Page 2 of 6
Amazon said the change was in response to the Turnbull government’s new online
GST laws, which require overseas businesses to collect the tax on products under
$1000.
Treasurer Scott Morrison slammed the move, saying if Amazon wanted to “take their
bat and ball and go home” Australians had “many other choices available to them”.
“Of course we’re going to proceed with this,” he told reporters on Friday.
“It’s $300 million estimated revenue that will be going to the states and territories for
schools and hospitals. We think it’s a very fair and reasonable step and I know
retailers have been wanting to see this for some time.
“I find it hard to believe that one of the world’s most technologically advanced
companies, two years later now say they’re unable to work out a technological
solution when it comes to the simple application of a sales tax on their products in
Australia.
“They face different VAT rates all around the world, UK, Canada.
“I think it’s disappointing that Amazon will take this out on consumers in Australia
but that’s their commercial decision. If they don’t like selling things into Australia
because they don’t like paying tax, there are plenty of options here at home.”
Australian shoppers may disagree, however.
As Amazon customers noted at launch, many products sold by third-party sellers are
significantly more expensive on the Australian site, meaning it was already cheaper
to buy from the US and pay the shipping fee.
For example, the popular Unicomp Ultra Classic Keyboard — a favourite among PC
enthusiasts — costs $139 on Amazon.com but $360 on Amazon.com.au, a 160 per
cent mark-up, while a Marc Jacobs Jane West End Suede handbag costs $894
compared with $2172.
The July 1 block will make it slightly harder — and more expensive — to buy things
from Amazon international, but there’s a good chance it will still be better than
paying inflated prices on the Australian site.
Here’s how you do it.
First, you’ll need to sign up for a VPN (virtual private network), and switch to a US
IP address. VPNs are like a middleman for your internet connection. Many people
already use them to trick streaming services like Netflix into thinking they are inside
the US to get around content blocking.
There are hundreds to choose from, typically ranging from around $10-20 a month.
Online reviews ranking the various services commonly cite NordVPN, ExpressVPN,
Private Internet Access, IPVanish and TunnelBear.
Second, sign up for an account with a freight forwarding service such as ShopMate,
Shipito, Hop-Shop-Go or Parcl. Freight forwarding services provide shoppers with a
US address to give to the retailer, and then ship the package to Australia for a fee.
“You’ll still get slammed for the GST by customs on the way in, but it’s 10 per cent
on massive savings you can’t get in Australia anyway. The consumer still wins out,”
said 56-year-old Greg, who spends between $2000-$4000 a year shopping online.
While eBay and Alibaba confirmed on Thursday they would not geoblock Australian
shoppers, Gartner principal analyst Thomas O’Connor has warned stores like ASOS,
Nordstrom or Macy’s may follow Amazon’s lead.
“This could be the start of a trend where there are more restrictions placed on
shipping to Australia,” he told The Daily Telegraph.
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Amazon: How to get around the Australian GST rip-off 29/6/18, 10*02 am
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“It would be surprising if others don’t join Amazon. [Price rises are] definitely a
possibility. If there are more retailers who join Amazon by doing this, that becomes
more and more real, and more and more likely.”
The Australian Taxpayers’ Alliance said the Turnbull government’s online shopping
tax “punishes Aussie consumers” and denies shoppers “the same choice available to
billions of shoppers worldwide”.
“Last year, the ATA gave evidence to a Senate inquiry that the online shopping tax
would not make Australian retailers competitive, would not raise a significant
amount of revenue for the government and that the cost of implementing the tax
would force major online platforms to exit the market or cease serving Australians
entirely,” ATA policy director Satya Marar said in a statement.
“Now, after persistent denial by the government, we see these consequences in
action. With another federal election on the horizon, the online shopping tax is a
failure by the government to prioritise the interests of working Australians and their
families.
“Instead, we see capitulation to intense lobbying by major retailers whose products
remain significantly more expensive on average than similar goods available online
overseas due to a combination of burdensome local pressures such as zoning laws,
electricity costs, strict labour regulations and red tape.”
Amazon announced the move on Thursday in an email to customers, apologising for
“any inconvenience” but saying the change was necessary to “allow us to remain
compliant with the law”.
An Amazon spokesman said the company “had to assess the workability of the
legislation as a global business with multiple international sites”. “Based on our
assessment, we will redirect Australian customers from our international sites to
Amazon.com.au,” he said.
On Thursday, Mr Morrison defended the decision to push ahead with the
controversial change and slammed Amazon — which could become the world’s first
trillion-dollar company — and its founder Jeff Bezos, the world’s richest man.
“The second biggest company in the world, run by the richest man in the world,
shouldn’t get a leave pass from paying tax in Australia,” he said.
“The government doesn’t apologise for ensuring multinationals pay a fair amount of
tax here in Australia. That tax revenue is used to fund essential services.
“If multinationals aren’t forced to pay their fair share of tax, they will have a
competitive advantage over retailers here in Australia, on our own main streets and
in our shopping centres.”
Around 4.6 million Australians visited Amazon’s US site in November 2017, the
month before its Australian website went live, according to online measurement firm
Nielsen.
Update: Amazon has clarified that Australian users will not need to use a VPN to
access its US site from July 1. Australian customers will still be able to purchase
from the US site but Amazon will only ship to US addresses.
[email protected]
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Economists throw doubt on generic drug
price advantage over branded version
16 September 2013
(Medical Xpress)—People given a choice between
generic or branded drugs should look closely at the
ingredients in the drug they are buying, argue
economists from Deakin University’s Graduate
School of Business.
In a paper published in the Berkeley Electronic
(BE) Journal of Economic Policy and Analysis the
researchers (Munirul, Vijay, Aaron and Pasquale)
throw doubt on the claims by governments that the
introduction of generics really does benefit
consumers.
Lead researcher Dr Munirul Nabin said
governments generally argued that simplifying the
entry process for generic drugs increased
competition in the pharmaceutical sector, causing
prices to fall.
“However a number of studies have shown that
prices of branded drugs actually increases after
generic drugs enter a market – an effect
economists call the Generic Competition Paradox,”
he said.
Dr Nabin said economists theorised there were a
number of reasons why the phenomena occurred,
including doctors preferring to prescribe branded
drugs over generics and doctors referring patients
who had didn’t have health insurance to generic
drugs, however Deakin’s analysis based on data
from Canada revealed another explanation.
“It is not generic drugs vs branded drugs that is the
issue, but whether the generic drugs are
therapeutically equivalent to the branded variety
that is the factor,” he said.
Dr Nabin said put simply both generic and branded
drugs had two types of ingredients, active and
inactive.
“In Australia and elsewhere the active ingredient in
both the branded and the generic has to be
biologically equivalent and there are regulatory
criteria around this,” he said.
“However the inactive ingredient in the branded and
generic versions can differ.
“They may have different release mechanisms,
dyes, pH adjusters and different salt combinations,
all of which affect the stability and performance of
the drug and consequently its effect on the patient.
“This nuance is well-known in the medical
community but there is a growing body of medical
evidence which suggests that just because a drug
is biologically equivalent, it does not make it
therapeutically equivalent and thus
interchangeable.”
Dr Nabin said medical researchers had highlighted
issues with generics, particularly for patients
suffering severe illnesses such as epilepsy and
depression.
“Anti-epileptic drugs and some psychotherapeutic
drugs exhibit a narrow therapeutic index which
makes it difficult for doctors and patients to
substitute between the two varieties of drugs,” he
said.
“Because of this the price of branded drugs is likely
to rise after the generic drugs enter a market, not
fall.
“To overcome this governments need to segregate
drugs into their drug class when considering the
effect of generic entry on price.
“If they don’t they may find their health costs go up
because the efficacy of the drug is not the same
and more money is spent retreating patients as
side-effects increase.”
More information:
www.degruyter.com/view/j/bejea …
1 / 2
4/1935-1682.3234.xml
Provided by Deakin University
APA citation: Economists throw doubt on generic drug price advantage over branded version (2013,
September 16) retrieved 7 November 2020 from https://medicalxpress.com/news/2013-09-economistsdrug-price-advantage-branded.html
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part may be reproduced without the written permission. The content is provided for information purposes only.
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