The Impact of Online Shopping Tax on Online Retailers and Australian Buyers

1. In economics, market defines an exchange relation between buyers and sellers of a specific good or service (Baumol and Blinder 2015). At present, people have increasing adapted the tradition of shopping on an online platform for a greater convince and wider range of choice. The online market however adversely affects the local retailers by substituting their demand with similar products online. The Prime Minister Turnbull has introduced an online shopping tax by adding a new clause to GST. The article discusses the implication of recently imposed online shopping tax in Australia.         

The giant online retailers respond to the tax imposed in terms of restricting Australian buyers to the international site and directing buyers to visit local website. The strategy has been initiated since July 1. Prime Minister Turnbull has recently implemented the online GST laws on all online business. The law directs collection of tax payment for all the products under $1000. The ne implemented tax law hampers online business environment for Amazon in Australian market. To escape from the tax payment, Amazon attempt to restrict access of Australian buyers to the international domain of the company. This move of Amazon however is slammed by Treasurer Scott Morrison on the ground that such a initiative of Amazon would not affect Australian buyers much as they have other available alternatives. He also added that, such move would not stop Australian government to continue with this policy. The imposed tax is expected to raise revenue of $300 million (news.com.au 2018). The collected revenue has been planned to be spent on hospitals and schools of different state and territories. Online retailers face a differentiated tax rate for different countries. The same is true for Amazon as well and it is surprising that the giant retailer is unable to find out a technological change to the problem of sales tax.

Impact of the tax is not limited to online retailers. The Australian buyers also suffered from the higher price. Customers of the online retailer report that same products are available at a higher in Australian website compared to that in their international website. Imposition of tax would increase the price further (theguardian.com 2018). If this goes long, then other online retailers such as Alibaba, eBay and other could possibly join Amazon.

The tax is imposed aiming to increase competitiveness of online Australian retailers. Another objective is to increase government revenue. There is possibility that neither of the two objectives have achieved.  The tax would fail to enhance competitiveness of Australian retailers. Rather the proposed tax discourages online retailers forcing many of them to exit the market. Buyers are likely to suffer from a lower available choice and higher price as charged by the local retailers. This indicates a failure of the proposed tax.

Advantages of Online Shopping Platforms and Their Contribution to Market Efficiency

2. As discussed in the article, the new GST law requires payment of a tax for online shopping. The imposed tax adversely affects both the domestic retailers and Australian buyers.  The article asserts that online shopping tax of Turnbull government actually punishes Australia customers and denies shopper the same available choices that are accessed by billion of customers online. The proposition can be validated using relevant economic theories and concepts.

Taxes are the compulsory payment made to the government. The tax is imposed on the online retailers. The online sellers now have to pay a significant portion of their earning to the government for the tax payment (Hill and Schiller 2015). This reduces incentive to seller to supply additional quantity in the market. The same is true for suppliers in Amazon. In order to avoid the tax payment, they are trying to redirect the Australian customers to the local website instead of accessing the international site. This limits the available choice to the buyers. In case of direct tax such as sales tax like this sellers are able to bypass the tax burden to the buyers. In order to make tax payment prices in the market increases. The limited choices are thus available to Australian buyers at a higher price (Cowell 2018). As claimed by customer of Amazon, same products are already available at a higher price to the domestic website of Amazon. For example, cost of the Unicomp Ultra Classic Keyboard is around $139 on Amazon.com. On Amazon.com.au, the same item is priced $360, indicating a mark up by almost 160 percent. This seems cheaper to purchase the item from US site with shipment fees. Introduction of tax would further increase the price. Many buyers would then restrict their online shopping to avoid inflated price. This can be better explained with the following figure describing the incidence of taxation with the help of a demand-supply framework.

The demand of online shopper is represented by the downward sloping curve DD. Without introduction of tax, behavior of the suppliers is captured by the upward sloping curve SS. E indicates the equilibrium point giving the market equilibrium price as P* and available quantity in the market is Q*. Suppose, an online tax is introduced to protect inters of the domestic retailers (Cowen and Tabarrok 2015). As the tax is imposed of suppliers, the immediate impact of the tax is to shift the supply curve inward to S₁S_1.  The new equilibrium occurs at the point E_1. After tax, buyers pay a higher price shown as P_B. Sellers however receive a lower price at Ps. The difference between buyers’ and sellers’ price is explained by the rate of imposed tax. As indicated in the above figure, after tax available quantity in the market reduces to Q_1. The Australian buyers are thus at a disadvantageous position compared to buyers all around the world (Chiang 2017). The situation can further be further worsened as other online retailers follow the path of Amazon and thus punish Australian buyers with limited choices.

Rationale Behind the Introduction of Online Shopping Tax

In recent years, there is a growing trend to shop online all over the world. The availability of a wide variety of goods at a reasonable price makes online shopping more attractive to buyers. The phenomenon called globalization encourages cross border movement of goods and services (Hong, Tam and Yim 2016). With spread of internet and growing connectivity between buyers and sellers al around the world provides a new definition of market namely online or ecommerce market.

Given below are some of the factors offering rationale for creation of such online shopping platform.

The online platform offers seller exposure to a new and extended market. There is no need for having physical stores or display items in specific stores. The online platform has a much broader exposure as compare to physical market bound by geographical limit. By surfing a single website buyer can view numerous products (Wu and Huang 2015). This offers buyers access to a wider range of choices. The online platform thus provides a broader client base in spreading both in domestic and international market.

The online platform builds a direct connection between buyers and sellers of specific products. Buyers surf different products online and then select the one of their choice. They can then directly order the selected products without any third party intervention. This benefits both the buyers and sellers engage in online transaction. In the presence of intermediaries’ buyers have to pay a higher price (Akroush and Al-Debei 2015). Under this profit of the sellers reduces as they only receive a portion of the price paid by the end users. The reduction in number of intermediaries thus increases welfare of both buyers and sellers and aggregate welfare of the society.

One primary advantage of online shopping is the availability of goods at a cheaper price.  Based on specific state, online sellers often do not charge any sales tax that offer them a huge advantage over other retailers. Buyers get the opportunity to compare the price of similar product on different online platform and get the cheaper one. Many suppliers offer facility of free shipping that further reduces price and cost.

Realizing several benefits from online shopping the popularity of online shopping platform increases. More and more sellers are now interested to offer their products online to have a broader client bases.

The traditional economic theories define market efficiency in terms of productive and allocative efficiency. The former is associated with production of a socially efficient quantity while the latter is associated with efficient distribution of the concerned good or service (Mankiw 2015). A perfectly competitive market ensure efficiency both in productive and allocative means.

Conclusion

Creation of online shopping platform enhance market efficiency by increasing competition in the market. The increasing competition in the market reduces market power of firms preventing them to charge a higher price and exploit customers. 

Opening up of online market helps to absorb all the produced quantity with the associated market demand (Nicholson and Snyder 2014). With a higher client base, whatever is produced can be sold in the market. There is also no scope for supply shortage because of availability of large number of suppliers.

One rationale for introducing online shopping tax is to increase competitiveness of domestic retailers. The imposed tax discourages overseas sellers. With the objective of escaping from tax payment, online sellers shift their focus from Australian market to other. Amazon is redirecting Australia customers to use their local website. Goods are already available at a higher price to the local website (Xu, Gao and Hammond 2017). Price will increase further after implantation of tax. As Amazon and other online retailers restrict Australian buyers, the demand for Australian retailer is expected to increases. Australian buyers has no other option but to depend on local retailers. In theory, this should increase efficiency of Australian retailers. The situation however is different in reality. In practice, the increased dependency on domestic retailers provide them considerable market power. Large retailers take the maximum advantage of this situation. This allow the big retailers to charge a higher price. The lobbying among large retailers increase market power of the sellers. They are able to sell the similar product at a relatively high price compared to similar product available in the market. Followed by a higher cost resulted from zoning laws, cost of electricity, labor cost and red tap regulation, these retailers face a higher production cost (Agrawal and Fox 2017). In order to overcome the cost, the retailers thus sell their products overseas at a higher pressure. The increased burden on cost offset the benefit from tax and fail to bring any improvement in efficiency.

Total surplus is defined as the sum of consumer and producer surplus. Consumer surplus is the gain to consumers while producer surplus represents the gain to producers (Nicholson and Snyder 2014). The change in total surplus can be obtained from the comparison of total surplus in the pre and post-tax period.

Before the imposition of tax, the demand and supply of the online shopping market is given as DD and SS respectively. P* is the corresponding equilibrium price. The surplus to consumers is given by the area A+ B +C +D. The surplus to producer is given as E+F+G+H+I.  Total surplus in the market is obtained as A+ B +C +D + E+F+G+H+I. Resources thus are efficiently allocated without tax.

After imposition of tax, the supply curve shifts upward to S₁S_1.  As the equilibrium in the market changes, there is an associated change in consumer surplus, producer surplus and total surplus. As buyers pay a higher price, surplus to consumer reduces. Consumers now receive a surplus equal to area A only. There is a decline in producer surplus, which reduces to area I +H. Government revenue from the tax is given by the area of the rectangle B+C+E+F. There is a decline in total surplus by D+G. This represents deadweight loss or social welfare loss. Imposition of tax thus leads to an inefficient resource allocation.

5. In the phase of intense competition with multinational, the local retailers offering their products in main street stores and shopping centers suffer from a competitive disadvantageous position. One rationale for taxing the multinationals is to offer local retailers a competitive edge. Large size of the multinational offers them the benefit of economies of scale (Halpin and Warhurst 2016). Economies of scale is said to exist when increase in output is associated with a decline in unit cost. Because of scale benefits, these large retailers can offer goods at a relatively low price. The low price and better quality product attract customers. The domestic retailers because of their relatively small size fails to offer price at a low price compared to their foreign competitors. This causes a loss in market share in competition with foreign partners. Therefore, a proposed tax on multinational is considered as a mean to increase competitiveness of local retailers (Miller and Oats 2016).

If multinationals pay a fair share of tax, then this reduces their profitability. In order to share the tax burden, these companies then increase the price. The increased in price depends on the magnitude of tax. Higher the magnitude of tax, higher is the price. The burden born by the consumers however depend on relative elasticity of demand (Kumar and Vijayalakshmi 2016). Higher the elasticity lower is the tax burden. The increased price then disheartens interest of buyers. They now try to substitute demand for foreign products with that sold by domestic retailers. In the short run, this increase the demand for local retailers. 

The figure above shows short run impact on domestic retailers because of tax on multinational companies. The demand curve shifts outward to D_1. As the demand curve shifts outward, the new equilibrium occurs at E_2. In the short run, firms are not able to expand their supply (Jain and Ohri 2015). The increased demand thus gives an upward pressure on price.

Over a relatively long period, sellers are able to expand their output by changing their fixed and variable inputs. This results in an increase in supply. As supply increase in the long run, supply curve shift outward to S₁S_1.  Long run equilibrium in the market is shown as E_2. The increased supply reduces the pressure on price (Friedman 2017). Price in the long-run reduces to P₂ while the available quantity under equilibrium increase to Q_2.  

The discussion above shows how the tax on multinationals benefit Australian retailers in the short run and long run. In practice, the benefits to retailers are not distributed among all the retailers uniformly (Mochrie 2015). Large retailers because of their larger market share enjoy most of the benefit. They lobby among themselves and then jointly exploit the buyers as in the case of online shopping tax in Australia. Instead of enhancing efficiency of retailers, the tax further worsens buyers’ position in the phase of lobbying by large domestic retailers.

References 

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