Sales Taxes and Internet Commerce

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A one percentage point increase in a state's sales tax rate increases online purchases by just under 2 percent.

States across the country are exploring new strategies to collect sales taxes on Internet retail transactions. Currently, many online purchases from out-of-state retailers go untaxed. In Sales Taxes and Internet Commerce (NBER Working Paper No. 18018) co-authors Liran Einav, Dan Knoepfle, Jonathan Levin, and Neel Sundaresan estimate the effect of sales tax policy on online purchasing patterns. They find that under the current policy regime, a one percentage point increase in a state's sales tax rate increases total (mostly untaxed) online purchases of state consumers by just under 2 percent. It also shifts 3-4 percent of online purchases from in-state retailers toward out-of-state retailers.

The authors analyze search histories and retail transactions from the online eBay marketplace. They exploit that fact that on eBay consumers initially don't know the location of sellers when they shop for items and compare prices. Only when they express interest in a specific item and click on a listing do they learn of a seller's location and the effective sales tax rate. The authors use data from millions of these tax "surprises" to estimate demand elasticities with respect to tax-inclusive prices, as well as to track "substitution patterns" of consumers after they learn about the total cost of an item.

They also use more aggregate data on cross-state trade flows and total online purchases on eBay as alternative ways to estimate tax sensitivity. A number of intriguing findings emerge from this analysis, including a strong "home-state preference" in which consumers are about 10 percent more likely to buy if the seller is located in their state. In turn, that favorable home-state bias, or loyalty, is challenged and diminished when consumers are confronted with a "negative tax surprise."

--Jay Fitzgerald