An optimal location strategy for Internet sellers in markets with different tax rates

R.E. Wright, E.J. Levin

Research output: Contribution to journalArticle

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Abstract

The traditional view that a high sales tax rate reduces trade by driving a wedge between the purchase and sale price may not apply to internet commerce for two reasons. The first reason is that the sales tax paid by buyers purchasing via the internet is determined by the tax rate in the region of the buyer. The second reason is that a high sales tax may lower the before-tax price if sellers absorb part of the tax. Taken together, this implies that internet distributors may profitably target customers in regions with low tax rates by locating their selling addresses in high tax regions. Consequently the optimal marketing strategy for a global internet distributor may include siting selling locations in regions with high tax rates in order to target customers in regions with low tax rates. An empirical analysis of the European car market suggests that this is more than a remote theoretical possibility by demonstrating that the before-tax prices recommended by manufacturers for new cars are lower in high tax countries.
Original languageEnglish
Pages (from-to)42-47
Number of pages5
JournalBusiness Economist
Volume34
Issue number1
Publication statusPublished - 2003

Keywords

  • internet trading
  • tax rate differences
  • automobiles
  • taxes
  • economics
  • internet
  • online trading

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