Optimal consumer sales tax policies foronline-offlineretail operations with consumer returns

Multichannel strategies are widely observed in practice. In some jurisdictions, the previously tax-free online channel is now required to remit sales tax. Motivated by policy evolution and sales-tax practices, we build analytical models to study the effects of sales tax on multichannel strategies and social welfare (which is defined as the overall surplus minus the negative external impact). We find that retailers prefer the online-and-offline channel to others when the product value is low relative to the consumer channel preference. If the offline sales tax rate is sufficiently high, the offline channel may simply function as the showroom. We also explore the optimal sales tax rate(t) that can maximize social welfare. We recognize that sales tax not only directly affects social welfare by influencing the optimal price (and service) decisions in the supply chain, but also indirectly affects social welfare through retailers' channel choice. In particular, imposing an online sales tax for low value products on small retailers only to transfer revenue from the retailers to the government; it is ineffective in increasing social welfare. We advise governments to develop sales tax policies based on consideration of channel type, product category, and the fit between the channel and product. Whereas an online tax free or a uniform tax rate fits low value products, setting different tax rates for different channels can be admissible for high value products. Counterintuitively, we also find that consumer showrooming may increase social welfare, as it reduces product returns (and the corresponding environmental impacts).

Automated summary

The study examines the impact of sales tax on multichannel strategies and social welfare. It suggests that retailers prefer the online-and-offline channel and that offline channels may function solely as showrooms if the offline sales tax rate is high. It advises governments to consider channel type, product category, and channel-product fit when developing sales tax policies for different value products.