I received an email from a client of mine asking me how to respond to his situation. He runs a local brick and mortar store with products that range from a few dollars to around $10,000. He received an email from a customer saying that the customer would save $260 in sales tax by purchasing a product from an online dealer rather than my client’s store. This gives the online store a competitive advantage. My client said he receives similar emails weekly. He is forced to make a deal for specific customers or lose their business because they are the rational utility maximizing online consumers. His customers are indifferent to the products and realize that they can have the same utility from a product that they can buy cheaper online than the one at his store.
The products my client sells are homogeneous with other products. The exact same products are available elsewhere. The way that my client can differentiate himself from the internet is by having classes in his store, which still does not differentiate his main product. Before the internet, my client had somewhat of an oligopoly market in Utah, his store being the largest of few that could compete. With the internet, not only does he have to compete with more firms, but he has to deal with the advantage that the government has given others on the internet.
For years, politicians have been prodded by brick and mortar store owners to level the playing field for them in terms of sales tax (Reuters). There are laws for citizens to report use tax on their individual income tax returns but few do, and auditing individuals for this purpose would be next to impossible while privacy laws exist. So, the way the current laws are written, the government has given an advantage to stores that sell without sales tax. This gives my client these managerial options: Reduce profit margin to compete with online stores or lose customers with a lowest price no matter what ideology.