State-imposed sales taxes ranging from 7% to 2.9% are applied in 46 of the 51 US states and in principle apply to all goods purchased, whether in-store or online. However, due to a Supreme Court case involving a mail-order catalogue company and pre-dating the birth of online retail (Quill v. North Dakota, 1992) online retailers are only obliged to collect sales taxes if they have a 'physical presence' in the state where the purchaser resides. In principle consumers in other states are obligated to pay any sales tax due via their annual tax return, but few actually do so (and many are unaware of the requirement). This situation gives e-tailers a de facto advantage in terms of consumer pricing and profit compared to bricks and mortar stores and results in a high level of lost tax revenues at state level.

California is not the first state to introduce a law attempting to compel online retailers, of which Amazon.com is by far the largest, to apply the appropriate state-level sales tax to purchases made by its inhabitants, but this is the first time that the company has appeared willing to comply. In 2008 Amazon sued the state of New York when it introduced a law to compel Amazon to levy sales taxes on purchases made by its residents. The e-tailer has also terminated relationships with affiliate companies in Arkansas, Colorado, Connecticut, Illinois, North Carolina and Rhode Island, claiming that it no longer has any 'physical presence' in these states and thus is not required to levy the taxes. The company is also reported to have offered to create 6,000 jobs in Texas if that state left the status quo unchanged. Amazon initially used similar approaches (cutting ties with affiliates and proposing job creation programmes) in California, before attempting to galvanise consumer support through a petition. In September 2011, however, Amazon has struck a deal with California that will see it and other online retailers begin to collect sales taxes from California-based customers in financial year 2013.

The issue here is not whether sales tax should be paid on these purchases, but whether it is the responsibility of Amazon and its peers to shoulder the administrative burden of applying the different levels of tax on an individual basis to each purchase. California's size (it is the largest state in the Union and has consistently generated 13% of total US GDP in recent years) may have played a role in convincing Amazon to play ball, but it seems difficult to see how the company can now continue to argue that it is unable to perform a similar service for other states.

Why does this matter?

The ongoing debate about payment of sales taxes in the US highlights the impact the inclusion or exclusion of such taxes can have on the overall value of any given product area. IHS Screen Digest analysis indicates that impact in the UK of an increase in VAT from 15% to 17.5% at the beginning of 2010 reduced the expected decline in total consumer spending on video from initial forecasts of over 5% to 3.5% by year end, despite the fact that a similar improvement was not experienced at distributor level. 

IHS Screen Digest has historically included VAT or sales tax in published consumer spending figures for all international markets in the Video Intelligence service with the exception of the US and Canada, where the wide variation between federal- and province-level taxes in Canada and between state-level taxes in the US meant that only consumer revenue data (excluding sales tax/VAT) was available.

However, following an extensive process of research and data modelling we are now able to estimate sales taxes paid in the US and Canada on average prices and thus total video spending inclusive of sales tax in these key markets. The methodology uses a detailed analysis of GDP by territory and by province to calculate a weighted national sales tax uplift of up to 13.8% for Canada (varying by year) which is then applied to the published historic and forecast Canadian physical video prices and thus consumer spending numbers. A similar methodology has been used to calculate total state-level sales taxes paid by consumers in the US market, allowing for the non-payment of such taxes on online sales. This has the effect of increasing total US consumer spending by almost 5% annually. Subscribers should note, however, that it is not possible to extend this blended tax figure to include sales taxes levied at local or city level; for example, consumers in Los Angeles currently pay an additional 2% sales tax on top of California's 6.75%.

US consumer revenues (excluding sales taxes) will continue to be available through our US Video Intelligence service while the newly-launched Home Entertainment KPIs add-on service contains both consumer spending (inc. VAT/sales tax) and consumer revenue (exc. VAT/sales tax) date for a wide range of directly comparative home entertainment metrics.

Video Intelligence subscribers will be notified through the usual channels as soon as the new US and Canadian data is available online.