Thursday, December 21, 2006

Shopping Online this Christmas?

As Christmas draws near, I suspect many of you have been resorting to online shopping for some of your gifts this year. I’m already getting the messages from vendors telling me that I’m going to be too late for shipping to arrive by Christmas, so perhaps by now the rush is about over for them. But I suspect it will be another positive year for online sellers. In fact, having spent a couple of days out shopping this season, I ask myself why I don’t do everything online. With great shipping service, it is all too convenient just to let your fingers do the walking.

A recent article shows that internet sales options often have higher gross margins than other brick and mortar stores. A study by Forrester research indicates that such margins are double those of traditional stores. (That article can be found here:
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Labor cost savings, as well as the avoided costs of expensive retail locations, are bound to contribute to the difference. However, one thing that really drives the alternative sales medium is the trust consumers have for the online experience. We believe we will be treated fairly, and thus we feel confident in ordering through the Internet.

One of the topics discussed at the IBLT conference (see my post from last Sunday) was the matter of retail selling on the Internet in the European Union. Gosta Petri, an administrator for the European Commission involved in consumer protection, spoke on the challenges of harmonizing national treatments for consumer protection. A survey of EU consumers found that only six percent made cross-border purchases on the Internet. By comparison, between 20 and 30 percent made purchases within their national boundaries. More than 50 percent thought that a cross border purchase would subject them to greater risks, and that their interests were less likely to be protected.

The business community also matched this sentiment. Only 25 percent advertised or marketed to members of other EU states. This low percentage was apparently attributable to the fact that some 42 percent thought that complying with the regulations of other nations was an obstacle to trade. (However, some 20 percent thought this was not a problem.)

Though I think in the U.S. we often have the option of purchasing goods from U.S. sellers, these purchases would often cross state borders. With the exception of wine merchants, who are still operating with some constraints on sales of alcoholic beverages within particular state borders due to regulatory requirements, we find few markets that are fragmented. Sales tax obligations perhaps come the closest to fragmenting U.S. markets, as some sellers have minimum contacts in some jurisdictions, but not others, which are sufficient to provide nexus for tax purposes. However, for the most part, we can thank the expansive interpretation of the dormant Commerce Clause for removing a lot of friction from the marketplace.

We all have some distance to go before we can truly have free trade. However, it appears that there is sentiment for greater harmonization and less friction in the E.U. We’ll see whether they can get that done. And in our own country, we need to focus on eliminating barriers that keep us from trading freely here within our own borders, as well as with other countries.


1 comment:

Anonymous said...

I agree that internet shopping is convenient and often economical. One does have to be attentive to the sometimes very high shipping and "handling" costs.
But I object to the "tax cheat" aspect which robs states and municipalities of needed revenue for essential services. In moderation I favor sales and other indirect taxes which tend to reward savings over consumption. I would prefer the complex but economically advantageous "value added tax" (VAT) used by most OECD countries because it is "geographically" neutral: imports pay the same tax as domestic goods.
Internet sales should pay sales taxes that "bricker and mortar" retailers must pay. In the EU the general rule is that you pay the VAT at the rate imposed on the seller. I.e. if a Dane buys from England, he/she pays the 17% British VAT and not the 25% Danish VAT. But the EU general requires its members to have a minimum VAT of 15% to "harmonize" the market.
In the USA a fair system would perhaps divided the sales tax: 50% at the seller's rate and 50% at the buyer's rate. Since there are so many tax rates (many states have 2 or 3 rates: state, county, city), states would be required to set a single "internet/mailorder" rate for such interstate transactions.