sealPurdue News

November 11, 2002

Purdue retail expert: Increased state sales tax not too taxing

WEST LAFAYETTE, Ind. – When Indiana's retail sales tax goes up from 5 percent to 6 percent on Dec. 1, it won't significantly affect retail sales or consumer behavior, says a Purdue University retail expert.

Richard A. Feinberg, director of Purdue's Center for Customer-Driven Quality and a professor of retail management, explains that consumers are not sensitive to small increases in sales taxes. The increase in the Indiana sales tax adds 5 cents to a $5 purchase and $10 to a $1,000 purchase, amounts most consumers consider insignificant.

"Most Indiana consumers are not even aware at this point that there will be a sales tax increase," Feinberg says. "It will take a while for them to learn they are actually paying more per transaction. Therefore, even if there were a minimal impact, it will be spread across the coming months and not have much effect on holiday shopping."

In 2001, Indiana collected about $3.8 billion in sales tax revenue, Feinberg reports. With the sales tax increase to 6 percent and the normal growth in retail sales, Indiana will collect about $4.6 billion dollars in sales taxes in 2003.

Consumers could choose to shop at lower tax-cost alternatives, such as the Internet and catalogs, where most customers pay no state sales tax, much less an increase. Internet purchases are currently not taxable. While most states officially require consumers to report out-of-state purchases for tax purposes, enforcement is difficult for states.

Shopping in lower-tax states will not be that big a factor, according to Feinberg.

"Michigan, Kentucky and Illinois have sales tax rates roughly the same as the new Indiana tax, so there is no reason for Indiana shoppers in counties bordering these states to go across state lines to buy even higher priced items," Feinberg says.

Ohio's retail tax is 5 percent, which Feinberg says may cause some Hoosiers living close to Ohio to cross into the Buckeye State to save on their large purchases.

Even though Feinberg doesn't expect the state's sales tax to be overly taxing to consumers, he says shoppers still need to pay attention once the new rate goes into effect.

"Consumers should be very careful to check transaction receipts because reprogramming of registers and lack of familiarity of associates to new tax tables may result in a significant number of errors," Feinberg says. "Some research shows that mistakes made at the cash register tend to favor the retailer."

Retailers also need to be aware of the Dec. 1 change, Feinberg says.

"Consumers who suddenly realize they are paying more may be confused or angry," he says. "So retailers should think about putting up notices and signs at the point of sale to notify and educate consumers that it is not the retailer's decision to raise their taxes."

Feinberg says retailers also should train sales associates to handle consumers who may be angry when they realize the tax has increased. There may be a tendency to blame the store as a proxy for state government, signs notwithstanding, he says.

Not widely known is that retailers receive 1 percent of sales tax funds they collect as payment for collecting the tax for the state. The collection allowance for retailers is being lowered to 0.88 percent. This effectively pays the retailers exactly what they would have received at the 5 percent tax rate.

While the sales tax will have little effect on consumers, the stakes are high for the state.

"Retail sales are a critical component of state and local government revenues," Feinberg says. "Because sales taxes raise so much money needed to balance budgets in these difficult economic times, like Indiana, many states are considering increasing their retail taxes.

Writer: Mike Lillich, (765) 494-2077,

Source: Richard A. Feinberg, (765) 494-8301,

Purdue News Service: (765) 494-2096;

Related Web site:
Center for Customer-Driven Quality home page

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