New study about online sales tax asks the wrong questions

According to a recent article in The Atlantic, a new study by “Stanford researchers” tries to take a look at the effects that sales tax would have on online shopping.

The problem is, they they don’t take into account that sales tax is already due on online purchases—a point derided in the study as “tax surprises.”

The study, “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.” It doesn’t include real estate and auto transactions.

The study concludes that “a one percentage point increase in a state’’s sales tax increases online purchases by state residents by just under two percent, but decreases their online purchases from home-state retailers by 3-4 percent.”

But the same sales tax you pay locally is already due online. Nobody is suggesting raising sales taxes, online or otherwise—certainly not differentially. So what does this study really tell us about online sales tax collection?

Not much. It doesn’t take a team of economists to tell us that an increase in sales tax rates causes a decrease in sales, at least temporarily. Thank goodness raising sales tax rates isn’t on the table.

What we still don’t know is how online sales tax collection—having retailers collect the sales tax that is already due on online purchases, so individuals don’t have to calculate and remit it themselves—would affect online shopping. It’s too bad the researchers didn’t look at that question. But the Atlantic article ventures a guess:

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. (emphasis ours)

eBay is on record as opposing online sales tax collection—is it possible that they sponsored or otherwise supported the study in the hopes that it would add fuel to their argument?

After several days of consideration, this important question burned brighter and brighter, so we gave in and bought our own copy of the 42-page study (for $5.00, and no, they didn’t charge sales tax—see picture—and yes, e-books are subject to sales tax in the State of Washington. Mental note: Don’t forget to report and remit $0.48 to the Washington Department of Revenue because the online seller refuses to do this for me like every local store must.)

The paper is very upfront about pointing out potential conflicts of interest. One of the four authors, Neel Sundaresan, is Senior Director for eBay Research Labs and is employed by eBay. Another of the authors is Professor Jonathan D. Levin, Chair of the Department of Economics at Stanford University, who was a paid consultant to eBay Research Labs in 2010 and 2011.

Don’t misunderstand the point of our post—we would love to see a study that truly looks at the actual effects of online sales tax collection on online shopping. Unfortunately, this isn’t it.

We also wish the team had taken a moment to report on two very basic questions:

1. Out of all the transactions data they had access to (all transactions from 2008 to 2010), how many transactions included sales tax?
2. Out of all the sellers represented in the transaction data, how many sellers conducted more than 200 transactions or had over $20,000 in sales in each of the three years? Similarly, how many sellers exceeded $50,000 in sales in each of the three years? Finally, how many sellers exceeded $150,000 or $500,000 in sales in each of the three years?

Given the intensity of debate around this issue at the local, state, and federal level—particularly around these two points—it is unfortunate that the researchers missed (or avoided) the opportunity to provide such insight.

FedTax makes it easy for businesses to calculate, collect, and remit sales tax with its free TaxCloud sales tax management service. It was founded by e-commerce veterans who have extensive experience in large-scale internet services and have been directly involved in building some of the most recognizable brands on the internet, including Google, American Express, Microsoft, and Expedia.

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