For Target, Best Buy, long sought online tax bill seems close

  • Article by: THOMAS LEE , Star Tribune
  • Updated: May 6, 2013 - 3:56 PM

E-commerce advantage is service, not prices, some say.

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With the U.S. Senate poised to pass a bill to allow the collection of online sales taxes, mega-retailers such as Best Buy Co. and Target Corp. are close to a legislative dream they have pursued for decades.

Photo: Glen Stubbe, Star Tribune

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With the U.S. Senate poised to pass a bill to allow the collection of online sales taxes, mega-retailers such as Best Buy Co. and Target Corp. are close to a legislative dream they have pursued for years.

Only one problem: the issue might not matter as much anymore. Best Buy and Target, both based in Minnesota, have long argued that Internet giants like Amazon and eBay can unfairly offer lower prices because states do not require them to collect sales taxes. The federal legislation, called the Marketplace Fairness Act, authorizes states to require online retailers to collect the tax.

However, some experts say Amazon’s perceived dominance over Target and Best Buy has more to do with Amazon’s superior e-commerce operations — including technology, service, and inventory management — than a price advantage. In any case, passing the law might not erase the perception, long ingrained in consumers, that Amazon offers lower prices than its brick and mortar rivals.

“Pricing has long been a fixation” for retailers like Target and Best Buy, said Amy Koo, an analyst with Kantar Retail consulting firm in Boston. “It sort of misses the point.”

That’s not to say Amazon doesn’t enjoy a pricing edge. Analysts estimate Amazon’s prices, on average, are 5 to 7 percent lower than Best Buy, and that’s down from more than 10 percent years ago.

“Target is encouraged that the Senate is considering this important issue, and that there has been bipartisan support for the Marketplace Fairness Act,” the company said a statement. “We will continue to advocate for this legislation, as we believe it creates a level playing field for retailers.”

But how much of Amazon’s price power has to do with sales taxes is unclear. Given its size and reputation for efficiency, Amazon can consistency pass savings on to the consumer, even at the expense of profit margins.

The sales tax effect “is hard to quantify,” said David Strasser, a retail analyst with Janney Capital Management. “But it has to have an impact.”

A recent Stanford University study that examined data from eBay concluded that purchases fell roughly 2 percent for every 1 percentage point increase in the sales tax charged by the seller.

But aside from that limited study, hard data are rare, even for Best Buy.

“What we are seeing in states where we have a level playing field with Amazon, that’s where you can make some comparisons,” said Laura Bishop, the Best Buy’s vice president of government relations. “But it’s pretty early.”

‘Showrooming’

Target and Best Buy also suffer the effects of “showrooming,” the idea that shoppers visit stores only to purchase products later online less expensively.

“One of the biggest beneficiaries of showrooming to date has been Amazon,” according to a recent report by analytics firm Placed Inc., “whose ability to offer goods at a lower price across multiple categories has left nearly no retailer untouched.”

Showrooming is more prevalent now because of “the near ubiquity of smartphones that bring the pricing power of the Internet through every retailer’s front door.”

According to its surveys, Placed estimates 10.7 percent of its customers visited a Target store in January, the second-highest percentage behind Wal-Mart. Best Buy placed fifth, with 4.8 percent of Amazon’s customers went to a Best Buy store that month.

Placed therefore concluded that Best Buy and Target in particular “face some of the strongest threat of showrooming in their aisles.”

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