Would Sales Taxes Put a Crimp in Online Shopping?

A new study from Stanford might give eBay and Amazon reason to worry about what will happen if sales tax comes to the web.

Aside from the death of an occasional big box retailer -- Borders and Circuit City, we knew thee well -- one of the bigger downsides to rise of online shopping has been its impact on state budgets. Thanks to a 1992 Supreme Court decision, web merchants don't have to pay sales tax in states where they don't have a physical presence. This exemption, while fabulous for consumers, may be denying states billions of dollars each year in much needed revenue -- not to mention making it even tougher for brick and mortar stores to compete.

There's a bill sitting in Congress that would rectify this situation. It would make it possible for states to start collecting all of the sales tax they're currently missing out on, as long as they instituted a few basic procedures to simplify the process. It's a pretty plainly sensible piece of legislation that appears to be accumulating some substantial bipartisan support. But all of this begs the question: If sales tax comes to the web, will it drive shoppers back offline?

A new study from a group of Stanford researchers is offering some timely answers. Their working paper, out this week on the National Bureau of Economic Research, looks at how sensitive online retail is to tax changes by tracking the behavior of eBay users. Why just eBay? With more than $30 billion in revenue, the company simply does an enormous amount of business, and the paper's author's believe that whatever happens on its servers can probably tell us something about the habits of online shoppers as a whole. The site also allows users to choose between sellers located all over the country. If someone in high-tax Louisville, Kentucky, is looking for a good deal on, say, Tide, they can easily look for a merchant out of state. That ability to choose is key to determining how shoppers react do different tax rates.

Ultimately, the research team dug into a massive trove of data -- one section of paper examined all eBay transactions from 2008-2010, excluding real estate and cars -- using a few different methods to determine whether tax rates influenced where state shoppers decided to purchase items from. They also looked at whether changes to local tax rates over time influenced how many people in a state shopped online.

As it turned, out, taxes mattered -- or rather, changes in taxes mattered. Somewhat unexpectedly, the researchers found that people in states with high sales taxes tended to spend less on eBay compared to other Americans, not more. But changes in taxes clearly affected whether shoppers bought goods online, and who they bought from. Specifically, the team estimated that a 1 percent change in sales taxes would lead to a 2 percent increase in online shopping within a state, and a 3-4 percent decrease in purchases from local online merchants.*

The group's math suggested that lowering a state's sales tax would also have an impact. Specifically, a 1 percent decrease would lead to 1.5-to-2 percent fewer online purchases by state residents.

Now here comes the part that might worry eBay and Amazon. If you extend the team's findings to their logical conclusion, introducing a sales tax online could convince a lot of customers to get up from their computers and hit the mall instead. As they wrote:

As of January 1, 2010, the population-weighted average sales tax in the United States was about 7.3%. Taken literally, our estimates imply that if that tax rate were applied to all interstate online transactions, and online prices responded in the same way that o­ ine prices do to the tax changes in our data, overall online purchasing would fall by about 12%.

A 12 percent fall would amount to billions of dollars in lost revenue. But chances are, the true impact would be smaller. First off, online retailers probably wouldn't sit pat and watch their customers disappear. As the study's authors not out, companies would theoretically drop their prices somewhat to keep shoppers around. It would cut into their bottom lines, but less severely. There's also the cultural issue. Many shoppers aren't just moving to the web because of price, but for convenience. All other things equal, it's their default choice. And as that attitude becomes more prevalent, the impact of a sales tax could diminish.

So would a sales tax put a crimp in online retail? Quite possibly. But it's hard to believe it would be anything but temporary.


*This was actually a smaller effect than some previous studies have found, including a seminal paper published by University of Chicago economist and former Obama adviser Austan Goolsbee in 2000. But given the scope and freshness of the Stanford team's data -- online shopping has changed a bit, after all, since the days of dial up -- it still seems significant.