Sales Tax and Internet Commerce

Innovation and Economic Growth, Networks, the Internet, and Cloud Computing and Internet

Article Snapshot

Author(s)

Liran Einav, Daniel Knoepfle, Jonathan Levin and Neel Sundaresan

Source

Working Paper, Stanford University, 2011; presented at the 2011 TNIT Conference

Summary

This paper uses eBay data to show that consumers use internet retailers to avoid sales taxes.

Policy Relevance

Firms and consumers will probably react to changes in sales taxes for online transactions by changing prices and locations.

Main Points

  • Internet retail accounts for more than $100 billion dollars of commerce annually in the U.S.


  • When a consumer buys a product online from a merchant with no presence in the consumer’s state, the consumer typically pays no sales tax.

    • The consumer is responsible for reporting the transaction and paying a “use” tax but this is not seriously enforced.


    • State governments may be failing to collect more than $10 billion in taxes annually.
       
  • eBay sales are about $30 billion annually, a huge market share; products of many varieties can be purchased through eBay, and buyers and sellers frequently (but not always) live in different states.

    • This makes eBay a good source of data for determining how consumers will react to the prospect of paying a sales tax.
       
  • The authors find that consumers are extremely averse to paying sales taxes online.

    • For every percentage increase in sales tax, purchasing drops by 2 percentage points.  For example, a potential buyer viewing an umbrella for which she would be charged a 3% sales tax is 8% more likely buy the umbrella than she would be if the sales tax were 7%.


    • When a state increases its sales tax by 1 percentage point, residents of that state increase their online purchasing from sellers in other states by 2% while decreasing their online purchases from sellers in their own state by 3-4%.


    • Other studies have found even larger effects.
       
  • Online retailers seem to avoid establishing themselves in states with large populations in order to increase their sales to residents in those states.

     

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