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Gateway unveils a taxing promotion

The PC maker launches a three-day campaign in which it will pick up the tax on PCs ordered at most of its Country Stores in the United States.

    Psst, want to buy a PC without paying sales tax?

    That's Gateway's pitch as it launches a three-day campaign, starting today, in which it will pick up the tax on PCs ordered at 285 of its 290 Country Stores in the United States.

    The program underscores challenges that direct-sales companies like Gateway and Micron Electronics face as they expand operations to include retail sales. In most states where those companies establish a physical presence, customers are forced to pay sales tax on the systems they order--even direct.

    The idea for Gateway's program came not from a high-paid marketing executive, but from Pennsylvania Gov. Tom Ridge. Earlier this month, Ridge instituted a "Tax-Free PC Week," Aug. 6 to 13, during which Pennsylvania residents could buy a PC from any manufacturer without having to pay sales taxes. The commonwealth estimated that buyers saved more than $100 on an $1,800 PC purchase.

    After watching sales spike during the period and noting a similar tax-free program in South Carolina, Gateway last week made a tax-free offer in eight states--California, Florida, Indiana, Illinois, Ohio, Michigan, New York and Texas--and extended the Pennsylvania initiative on its own. From Wednesday through Saturday, customers ordering PCs in Country Stores in those states discovered Gateway picking up the taxes.

    Gateway is offering the new promotion, today through Thursday, in virtually all of its Country Stores in the United States, except those in Alaska, Delaware, Montana, New Hampshire and Oregon, where no sales tax is collected.

    San Diego-based Gateway opened its first Country Store in September 1996 to a cool reception from Wall Street and industry analysts. Since then, however, the stores have become an important asset.

    "The Country Store model has been very effective for Gateway," International Data Corp. analyst Roger Kay said. "In the beginning (analysts) dissed it, thinking that it was a white elephant and the overhead would be too high. But they were on the right track."

    Still, the existence of the Country Stores means that the company must collect sales taxes, unlike rival Dell Computer. Because Dell, based in Round Rock, Texas, has a physical presence in only a few areas and does not sell at retail, it does not have to charge a sales tax. Others do, such as Compaq Computer and Gateway.

    In most states, PCs sold directly over the Web follow the precedent set by mail order and are not subject to sales tax, unless the vendor runs some type of operation in the purchase area or sells through stores there.

    "This has always been a big issue," PC Data analyst Stephen Baker said. "This is something that's been going around 20 years or more, since the growth of mail order--how do you tax mail-order sales? It's impacted a lot of business models."

    Micron faces similar issues. The direct PC maker increasingly offers its systems via in-store kiosks. Customers can order systems in about 358 Best Buy stores--as well as buy preconfigured PCs there--and at RadioShack of Canada outlets, where they may have to pay sales tax.

    Baker doubts that a sales tax deters sales. "Truthfully, I don't think most people make their buy decision on that last 5 to 7 percent. It can make a lot of difference, but I don't think it's the first reason why people buy or not."

    Gateway has used its Country Stores as a way to reach local customers and to help it move beyond just selling hardware. During the second quarter, "beyond-the-box" sales of intangibles such as training, education and maintenance accounted for 40 percent of Gateway's net income and 18 percent of overall revenue.

    "Gateway has really made the Country Stores work for it," Technology Business Research analyst Lindy Lesperance said. She estimates training and other intangibles offered through the stores to be almost "pure profit" for Gateway. Gross margins on training, for example, are about 80 percent.

    Last week, the company launched a campaign aiming to demystify PCs by offering consumers and small businesses extensive training in its Country Stores.

    "Gateway can leverage them to their market--consumers and in some respects small businesses. And that's a real good model if you're a direct vendor," IDC?s Kay said. "You don't have the inventory issues. You take the order and ship it. It kind of reminds me of the automobile showroom, where you have demo models on the floor."