Retailers That Collect Online Sales Tax Lose Business

Apr 29 2014, 3:09pm CDT | by

Online retailers have argued for years that they’ll lose business if they have to collect sales taxes on their online transactions. A new study by three researchers at Ohio State finds they are right. Paradoxically, the study may increase support by some online sellers for federal legislation to standardize collections across states. The study, by Brian Baugh, Itzhak Ben-David, and Hoonsuk Park, looked at five states that required Amazon.com to collect sales taxes. Once Amazon stated collecting, consumers in those states bought 9.5 percent less from the firm. Not surprisingly, the authors found that consumers were especially likely to change their shopping behavior to avoid tax on more costly items. For instance, they cut spending by 15.5 percent on purchases larger than $150, and by nearly 24 percent on goods or services that cost $300 or more. The authors also looked at where those consumers did buy. Most just shifted to other online sellers (that, presumably, did not collect sales tax). For instance, many simply bought from Amazon Marketplace merchants that are accessible on Amazon’s site but do not have to collect tax. Only a handful—about 2 percent—took their business to local bricks-mortar retailers, the study found. Those Main Street firms do have to collect tax. The study, published as a working paper by National Bureau of Economic Research, looked at sales data from California, New Jersey, Pennsylvania, Texas, and Virginia before and after they required online sellers with a physical presence in their jurisdictions to collect sales taxes. In practice, the levy applied only to Amazon and a handful of other e-tailers. Technically, of course, buyers still owe tax whether the seller collects or not but, in reality, almost no-one pays these use taxes. The Ohio State study is the latest research that appears to confirm that buyers change behavior to avoid paying sales tax. About a year ago, three researchers from Stanford and one from eBay found similar results after reviewing data from the firm’s online marketplace. They found that a 1 percentage point increase in a state’s sales tax rate leads to a 3-6 percent decline in
 
 

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