Amazon is losing business in states where it collects online sales tax

Amazon and other online retailers have argued for years that they’ll lose business if they have to collect sales taxes on their online transactions. According to a new study of Amazon sales, they're right, which may increase support by some online sellers for federal legislation to standardize sales tax collections.

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 online purchases from consumers in that state.

A third recent paper, by Ohio State’s Jeffrey Hoopes and the University of Washington’s Jacob Thornock and Braden Williams found that when investors expected that online sellers would have to collect sales taxes (following, for instance, published news that lawmakers were considering such a move), stock prices for those firms fell somewhat.

While some older research finds little or no evidence that online sales taxes reduce consumer spending, the Ohio State study and other new work shows strong effects.  And they may help explain why the political climate for federal legislation aimed at consistent sales tax rules for all online sellers seems to be changing.

It may seem counterintuitive at first, but Amazon and other large online sellers (though not eBay) now support such a measure. The reason: States are increasingly requiring them to collect. And, rather than lose business to other online sellers, they’d just as soon every retailer face the same burden.

The paper by Baugh and colleagues suggests that these while these online retail powerhouses may have little to fear from Main Street, they need to keep a close eye on their Web-based competitors who don’t  collect sales taxes.