Can Taxes Shape an Industry? Evidence from the Implementation of the “Amazon Tax”

• Author: HOONSUK PARK,ITZHAK BEN‐DAVID,BRIAN BAUGH
• DOI: http://doi.org/10.1111/jofi.12687
• Date: 01 August 2018
• Published date: 01 August 2018

THE JOURNAL OF FINANCE •VOL. LXXIII, NO. 4 •AUGUST 2018

Can Taxes Shape an Industry? Evidence from the

Implementation of the “Amazon Tax”

BRIAN BAUGH, ITZHAK BEN-DAVID, and HOONSUK PARK∗

ABSTRACT

For years, online retailers have maintained a price advantage over brick-and-mortar

retailers by not collecting sales tax at the time of sale. Recently, several states

have required that online retailer Amazon collect sales tax during checkout. Using

transaction-level data, we document that households living in these states reduced

their Amazon purchases by 9.4% following the implementation of the sales tax laws,

implying elasticities of –1.2 to –1.4. The effect is stronger for large purchases, where

purchases declined by 29.1%, corresponding to an elasticity of –3.9. Studying competi-

tors in the electronics field, we find some evidence of substitution toward competing

retailers.

OVER THE PAST DECADE,ONLINE RETAIL transactions have increased dramatically

in volume. According to the U.S. Census, online sales constituted 3.4% of retail

sales in 2007 and 8.9% of retail sales in 2017, corresponding to $453 billion in

online sales in 2017.1Many factors have contributed to the growth in online

sales, one of which is that out-of-state online retailers generally do not charge

sales tax, which has given them a price advantage over retailers with a pres-

ence in the state. This sales tax collection loophole has not gone unnoticed by

state governments or competing retailers. State governments are concerned

that these online sales depress local employment and erode tax revenues. Over

the last decade, many states have responded by requiring that Amazon, the

largest online retailer in the United States, begin to collect sales tax at check-

out. These laws are collectively referred to as the “Amazon Tax.” However,

despite the importance of understanding the effects of imposing sales tax on

online commerce, only a few studies explore how the imposition of sales tax

affects consumer behavior, online retailers, and brick-and-mortar retailers. In

addition, no previous study systematically looks at the Amazon Tax.

∗Brian Baugh is with the College of Business, University of Nebraska–Lincoln. Itzhak Ben-

David is with the Fisher College of Business, the Ohio State University, and NBER. Hoonsuk

Park is with Nanyang Technological University. We thank the financial institution for providing

the data set. We thank Raj Chetty; Ren´

e Stulz; and participants at the Industrial Organization

Conference at Tel-Aviv University,the NBER Entrepreneurship and Economic Growth Conference,

the NBER Public Economics Conference, the NBER Universities Research Conference, and the

AEA Conference for helpful comments. We are grateful for the financial support of the NBER

Household Finance Grant. Ben-David’s research is supported by the Dice Center at the Fisher

College of Business and by the Neil Klatskin Chair in Finance and Real Estate.

1See www.census.gov/retail/index.html#ecommerce.

DOI: 10.1111/jofi.12687

1819

1820 The Journal of Finance R

Figure 1. Histogram of (Sales Tax Revenue/Total State Revenue) for the 50 states in

2011. This figure illustrates the importance of sales tax revenues as a percentage of total state

revenues. The data come from the 2011 U.S. Census Annual Survey of State and Local Government

Finance: http://www.census.gov/govs/local/.This figure shows that the importance of this tax varies

considerably across states, ranging from 0% of state revenues in states without a sales tax (such

as Oregon and Alaska) to as high as 21.0% of state revenues for Washington. (Color figure can be

viewed at wileyonlinelibrary.com)

In this study, we fill this gap in the literature by examining how collecting

sales tax on online transactions affects consumers’ purchasing decisions. On-

line retailers that are not required to collect sales tax, including Amazon, enjoy

a price advantage. With effective sales tax rates as high as 10% in some juris-

dictions (after accounting for state, county,and city taxes), this price advantage

can be sizable. Indeed, as Gene DeFelice, vice president of Barnes and Noble,

the largest book retailer in the United States, puts it, “We are at a serious com-

petitive disadvantage against out-of-state, online retailers who pay no taxes.”2

We hypothesize that the introduction of the Amazon Tax will lead to a decline

in Amazon’s sales and substitution to alternative retailers. An additional factor

likely to facilitate customer migration from Amazon to alternative outlets is

the low search cost of online shopping.

State governments have been paying increased attention to the issue of sales

tax collection in light of both the Great Recession and the recent growth in

online retail volume. General sales tax represents an important part of state

revenues. In 2011, for example, general sales tax constituted 10.4% of state

revenues. Figure 1shows that the importance of this tax varies considerably

by state, ranging from 0% of revenues in states without sales tax (such as

Oregon and Alaska) to as high as 21.0% of state revenues for Washington.3

The issue of sales tax collection has also received attention from the federal

2See http://articles.latimes.com/2011/jan/20/business/la-fi-internet-tax-20110120.

3The 2011 U.S. Census Annual Survey of State & Local Government Finance can be found

online at www.census.gov/govs/local/.

Can Taxes Shape an Industry? 1821

government. The Marketplace Fairness Acts of 2013 and 2015, for instance,

represent attempts to allow all states to force retailers to collect sales tax on

purchases made by out-of-state customers, but neither Act has been adopted

into law.4Proponents of such online sales tax collection bills often tout the

elimination of the online retail sales tax advantage as “leveling the playing

field” and helping restore business and jobs to local economies.

A recent trend in state legislatures is to enforce the collection of sales tax on

online retailers, particularly on Amazon, the largest online retailer. Between

January 2011 and May 2015, 19 states implemented laws requiring Amazon

to collect sales tax from its customers. These laws provide an ideal setting

for examining the effects of sales tax collection on consumer behavior and the

consequences for related firms.

Our analysis of the effects of the Amazon Tax on purchasing behavior uses

data from an online financial account aggregator. This financial service enables

subscribers to concentrate all of their accounts in one place for viewing and

monitoring purposes. Our base data set includes information on 2.7 million

households and contains transaction-level entries similar to what is found on

bank and credit card statements. Due to the nature of this data set, our sample

contains households that are likely to be younger and more urban than the

general population. Though this potentially weakens the external validity of

our results, the sample represents a subset of the population that is growing

rapidly and hence is increasingly relevant to the overall economy.

We begin our analysis by using a traditional difference-in-differences

methodology to test whether households decreased their Amazon purchases

following the introduction of the Amazon Tax. Each state that adopted the

Amazon Tax during our sample period is considered “treated” following the

adoption, with the other states considered “controls.” Our results show that

the introduction of the Amazon Tax resulted in a persistent decline of 9.4%

in the amount spent on products through Amazon (net of sales tax, which we

hereafter refer to as the tax-exclusive price), which corresponds to an average

elasticity of –1.2. In an alternative specification, we find that a one-percentage-

point increase in sales tax leads to a $0.54 reduction in monthly tax-exclusive

Amazon spending, which corresponds to an elasticity of –1.4. We also test

whether these effects are more sensitive to households in high-tax jurisdic-

tions and find that these consumers do indeed have higher elasticities.

We further find that low-income households reduced their tax-exclusive

spending on Amazon more than high-income households (9.9% vs. 7.0%, re-

spectively). In addition, the percent reduction in spending on Amazon was

slightly higher among heavy Amazon customers. The highest tercile of Ama-

zon spending in 2011 reduced Amazon purchases by $6.22, which corresponds

to a 9.4% reduction, whereas the lowest tercile of Amazon shoppers reduced

expenditures by $1.65, which corresponds to an 8.0% reduction.

4The text and status of the bill can be found at www.govtrack.us/congress/bills/113/s743,

www.govtrack.us/congress/bills/114/s698.