The future of online sales tax remains uncertain. But a recent study conducted by Ohio State University (OSU) reveals an interesting trend: Consumers spend approximately 10 percent less when shopping on Amazon in states where sales tax is imposed, than in states that don’t levy sales tax on Internet purchases. This revelation could indicate an erosion of Amazon’s competitive edge over brick-and-mortar retailers in states that enact so-called “Amazon Laws.”
What’s more, the sales tax gap is likely to close even more if Congress someday enacts legislation similar to the Marketplace Fairness Act.
Online Sales Tax Debate Wages On
States want to collect sales tax on Internet purchases made by their residents for two reasons:
1. The most obvious is a need for additional tax revenues. States currently forfeit an estimated $23 billion per year in uncollected sales tax from online retailers.
2. Traditional brick-and-mortar retailers argue that the omission of sales tax gives online sellers an unfair advantage in the marketplace. Many businesses — especially small mom-and-pop establishments — have suffered from the sales tax gap.
In response to these pressures, some states have enacted “Amazon laws.” These laws extend the concept of nexus, beyond a physical presence in the state, to include the use of in-state affiliates to direct business to retail sites operated across state lines. For example, if a museum located in New York directs traffic to an out-of-state Internet business, the site must collect sales tax from New York residents, even if it has no other physical presence in New York. Amazon laws essentially treat affiliates similar to operating a sales force within state lines.
Amazon laws have received a mixed response from the courts. The Illinois Supreme Court sided with Amazon and overturned that state’s online sales tax collection requirement in 2013. But the New York Supreme Court upheld its Amazon Law — although the U.S. Supreme Court refused to hear an appeal of this case last December.
In recent years, Congress has introduced various iterations of federal legislation that would require online sellers to be responsible for collecting sales tax. Although there’s considerable support for such a measure, the proposals have stalled so far (see right-hand box).
In the meantime, Amazon has become one of the main targets of states that have begun to collect sales tax on Internet purchases. According to Amazon’s website, it already collects sales tax in 21 states, with Florida added to the list on May 1 (see right-hand box). Along with other online retailers, such as Walmart and Target, Amazon now publicly supports federal legislation that would require state tax collections for larger Internet retailers.
Closer Look at Online Buying Habits
Researchers at OSU wanted to know whether charging sales tax on Internet purchases would impact revenues for online retailers. So, they tracked the spending habits of 245,000 households that purchased products of at least $100 from Amazon throughout 2013. The research focused on five states — California, New Jersey, Pennsylvania, Texas, and Virginia — that began permanent collection of taxes on Amazon purchases between 2012 and 2013. The study analyzed the impact of sales tax on Internet commerce as well as on brick-and-mortar retail activity.
The OSU study revealed that imposing sales tax resulted in a 9.5 percent decrease in the value of products (net of sales tax) purchased on Amazon across all fives states. The researchers ruled out the possibility that the decrease in sales resulted from buyers stocking up on purchases just before sales tax was implemented. In fact, the effect increased around the implementation date, suggesting the sales decrease wasn’t driven by a temporary “anticipation effect.”
Researchers also investigated whether consumers decreased their gross spending on Amazon. The results showed that the total dollar amount spent on Amazon, including taxes, decreased by 2.8 percent in the wake of the law’s implementation.
In addition, the study suggests that the effect of online sales tax increases with purchase size. In other words, households are more likely to Internet shop to avoid sales tax on large purchases. On average, consumers decreased their spending by about 15.5 percent on purchases larger than $150 and about 23.8 percent on purchases equal to or larger than $300 when sales tax was imposed in the five states studied.
Finally, the researchers explored the extent to which households move away from Amazon to competing online and traditional retailers. Overall, they reported a 19.8 percent increase in purchases at competing online retailers, but only a 2 percent increase in local expenditures at brick-and-mortar stores. For purchases over $300, the study showed a 23.7 percent increase in purchases at competing online retailers and a 6.5 percent increase in purchases at local brick-and-mortar stores.
Looking at sales of Amazon Marketplace merchants, who generally aren’t subject to online sales tax, large purchases at these retailers increased by 60.5 percent after sales tax went into effect on Amazon purchases. (Amazon still benefits, albeit indirectly, from this boost).
Amazon Laws Fall Short of Intended Target
The OSU study shows that Amazon experienced a decrease in sales following the implementation of Internet sales tax. However, rather than leveling the playing field for brick-and-mortar establishments, consumers are more likely to shop at other online retailers that don’t charge sales tax, especially for large purchases, than traditional retailers. Congressional action may be the only way to minimize the sales tax gap between online retailers and brick-and-mortar stores.
- 13 May, 2014
- Haley Spain
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