By Jake Weatherly, email@example.com
While the Marketplace Fairness Act sits on Capitol Hill, retailers and consumers across the nation are already speculating and planning for what will happen if the bill passes into law, a move that will inevitably shift the landscape of the retail community and respective customer retention.
The Marketplace Fairness Act, also referred to as the “Internet Sales Tax” has already passed the Senate and been endorsed by President Obama. It would give states the option of collecting sales tax from any business that sells products to customers who live in their state, whether they sell via catalog, phone, or online store, unless their online annual out-of-state sales total less than $1 million, in which case, they are exempt. Forty-five states, plus the District of Columbia, currently charge sales tax. In order to collect sales tax from businesses, these states would be required to participate in the Streamlined Sales and Use Tax Agreement to simplify their tax codes by creating more uniform sales tax rates, rules, and boundaries. They would also be required to provide free software to help companies calculate sales tax.
Of course, among the heaviest hit would be e-retailers, who are currently not required to collect sales tax in states where they do not have a physical presence. Technically, consumers are currently responsible for paying sales tax on products they purchase online when they pay their income taxes, but because a collection mechanism was never put in place, most online shoppers do not currently pay any sales tax. Experts calculate that state governments are losing $11 billion-$28 billion in sales tax revenue.
While some retailers like Amazon, Wal-Mart, and Target are celebrating the Senate's vote in favor of the Marketplace Fairness Act, others are frantically trying to prepare for what will happen if the bill passes the House. Retailers will have 180 days after the bill becomes a law to start collecting taxes in all states that are participating. Many e-commerce retailers are already making adjustments to their infrastructure and warehouses, or instructing their IT teams to carve time out in their calendars to integrate the free software.
Many online businesses know that the biggest challenge they are likely to face if the Marketplace Fairness Act becomes law is keeping their current customers happy and loyal. It's not just e-commerce businesses that will feel the burden of this new law. In this economy, many people are acutely aware of every penny they spend, and they will continue to seek the best prices and deals to ensure maximum savings. The Marketplace Fairness Act is going to be a tough pill to swallow for consumers who are used to shopping online tax-free – most consumers are going experience a 5%-10% increase on their online purchases.
If enacted, the resulting increased costs at online shopping sites could significantly impact Internet buying behavior. In a recent survey from Endicia, 60% of online shoppers reported that they will change their online shopping habits if the Marketplace Fairness Act passes, and 44% claim they will shop online less. Other studies have shown that approximately 25% of consumers who shop online are very value-conscious and make buying decisions based on factors like taxes and shipping. Retailers will need to start thinking about new ways to market to these fiscally responsible shoppers.
Although they may be faced with increased costs and overhead to comply with the states’ tax laws, e-commerce websites are not going to be able to pass these costs on to their customers if they want to maintain their customer bases. By leveling the playing field between brick-and-mortar stores and their online only counterparts, the Marketplace Fairness Act means that all retailers will need to work even harder to attract and keep customers.
While online commerce accounts for only 5% of retail sales, e-retail has experienced explosive growth of 20% in recent years, while brick-and-mortar sales have not kept pace. Many experts believe that even with the new tax law in place, Internet retailers still have a competitive edge over brick-and-mortar stores, since they frequently have less overhead with lower rent payments, lower shipping costs, and fewer employees. By capitalizing on their larger margins, online retailers often create special offers, discounts, and deals for desirable market segments or to keep their most loyal customers coming back.
While those discounts, deals, and special offers are going to be important tools to offset the effects of the added taxes for cost-sensitive customers, customer experience is going to be a key differentiator as well. Whether they’re shopping online or at a local store, consumers want personalized offers that are relevant to their lifestyle. Creating a truly exclusive, targeted offer will not only make existing customers feel like retailers’ deals are tailored to their interests, but will also attract new customers and incremental revenue. For businesses with both a brick-and-mortar presence, it will be more important than ever to deliver a consistent customer experience both online and in person, whether this means offering the same discounts online as in-store, or making sure that every product that is available online can also be purchased or ordered in person.
Education is also going to be a key component for any company looking to gain a competitive edge. Retailers not only need to stay abreast of news about the Marketplace Fairness Act that affects retailers, they also need to impart information about the new law and its consequences in a digestible format to their customers. If online retailers elect to increase prices to reflect the new tax requirements, consumers will want to know these prices remain the most competitive, thus one tool to retain loyal customers can be providing an educational comparison matrix listing competitor prices before each purchase.
If the Marketplace Fairness Act passes the House and is signed into law by the President, it will undoubtedly have a measurable impact on e-commerce. However, if e-retailers can plan ahead and stay focused on their customers’ needs and the desires of their target markets instead of the controversy surrounding the law, they can succeed, Marketplace Fairness Act or no Marketplace Fairness Act.
Jake Weatherly is CEO of SheerID, a point-of-sale eligibility verification provider that enables merchants to provide exclusive offers to special interest consumer groups. He can be reached at firstname.lastname@example.org.