The Impact of the “Amazon Tax” on Local Sales Tax Revenue

[Pages:40]Whitney Afonso Paper prepared for the 2017 Public Management Research Conference. Please do not cite without permission from the author.

The Impact of the "Amazon Tax" on Local Sales Tax Revenue

Abstract: E-commerce has become an integral part of American's lives due to the ease of making purchases, comparison shopping, and the perception of lower costs. While e-commerce offers many benefits, it also imposes costs on government in terms of lost sales tax revenue. Due to the loss in revenue, both states and advocates at the federal level have pursued policies to require online vendors to collect state and local sales taxes. In February 2014 North Carolina began collecting an Amazon tax. This analysis examines how the Amazon tax affected local sales tax collections and whether that impact has been greater for urban, rural, or tourism-rich counties using a difference in differences model. It presents evidence that the collection of the Amazon tax increased revenues and that it most benefits urban jurisdictions.

Whitney B. Afonso afonso@sog.unc.edu School of Government The University of North Carolina at Chapel Hill Campus Box 3330, Knapp-Sanders Building Chapel Hill, NC 27599-3330

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Whitney Afonso Paper prepared for the 2017 Public Management Research Conference. Please do not cite without permission from the author.

Introduction

As e-commerce continues to grow it becomes increasingly important to examine the effect it has on government, including when e-commerce transactions are taxed. In 1999 Amazon only collected sales taxes on internet purchases in the state of Washington. Today it collects state sales taxes in 44 states, with collection in16 of them initiated in 2017 alone. Though in some states like Florida, Illinois, Iowa, and Pennsylvania Amazon is only collecting state sales taxes, it is not collecting local sales taxes. This paper uses the Amazon experience in North Carolina to analyze the effect that sales tax collection on e-commerce purchases has on the distribution of local sales taxes. The study includes analysis of tax distribution differences for urban, rural, and tourism-rich jurisdictions. Using North Carolina as the treatment group and South Carolina and Iowa as the untreated groups, a difference in differences model shows that the introduction of Amazon taxes increases local sales tax revenue and that urban jurisdictions receive more benefit from this policy change than rural or tourism-rich jurisdictions.

Amazon is an important part of individual consumers' use of e-commerce. In terms of dollars, Amazon makes up the largest share of e-commerce by a wide margin. Amazon had $82.8 billion in e-commerce sales in a twelve month period ending in May of 2016, the most of any e-commerce store. Walmart's e-commerce sales of $12.5 billion made it a distant second, with Target finishing 10th and generating only $2.51 billion.1 The Marketplace Fairness Act has been re-introduced in the Senate as S.976, a previous version the

1 Wahba, Phil. "In Two Charts, How Amazon Is Killing Its Traditional Competitors." Fortune, May 11, 2016,

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Whitney Afonso Paper prepared for the 2017 Public Management Research Conference. Please do not cite without permission from the author.

Marketplace Fairness Act of 2013 had been previously passed by the Senate. This legislation would give states the right to make online retailers collect state and local sales taxes even when the vendors do not have a physical presence in the state. The sales taxes collected from Amazon are a reasonable proxy for the proportion of sales tax revenue generated from online shopping. The estimates of the revenue generated by collecting the Amazon tax are likely conservative estimates of the effect of a law change like the Marketplace Fairness Act because when Amazon is taxed and other online vendors are not, consumers may shift to vendors that do not collect taxes.

Consumers have changed how they shop over the last three decades due to the emergence of e-commerce and discovery of the many advantages over brick-and-mortar retailers. This change has created concerns about negative impacts on local economies. A great deal of attention has been given to the extent to which e-commerce is crowding out brick-and-mortar options and the loss of state sales tax revenue it creates by doing so. Considerably less attention has been given to the impact on sales tax revenues at the local level. As the policy evolves and a greater number of online vendors are collecting sales tax, new questions emerge such as whether the shift toward e-commerce and the taxation of ecommerce has affected urban and rural jurisdictions differently due to issues like tax leakage and internet access.

The importance of e-commerce has grown exponentially. Agrawal and Fox (2016) estimate that online sales went from approximately $1 trillion in 2000 to more than $5 trillion in 2013. According to the most recent estimates, e-commerce makes up 8.4 percent of retail sales in the United States. This represents an all-time high and is three percentage

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Whitney Afonso Paper prepared for the 2017 Public Management Research Conference. Please do not cite without permission from the author.

points higher than only four years ago (Maguire 2013). While the majority of e-commerce transactions are business-to-business transactions rather than retail sales. The latter still constitute an important portion of e-commerce revenue. Online retail sales climbed from $28 billion in 2000 and $142 billion in 2008 to more than $322 billion in 2016, and are estimated to reach more than $485 billion in 2021 (U.S. Census Bureau 2010, Statista 2017).

There are many factors that help explain the growth of e-commerce, including greater access to broadband, but two factors are particularly relevant to this analysis. First, the consumer's ability to avoid sales taxes has been shown to be an important driver of ecommerce. Approximately 50 percent of the large online firms do not have nexus in the majority of states, therefore those firms are not required to collect state or local sales taxes. Those taxes are still owed, but not by the merchant. The lack of nexus shifts the burden of tax remission to the consumer who is legally obligated to, but typically does not, remit use taxes. Second, the greater diversity of goods available online creates a much larger retail agglomeration for consumers. In addition to the expanded variety of goods available, consumers also have access to product reviews allowing them to buy with more confidence (Hortacsu, Martinez-Jerez, and Douglas 2009; Agrawal 2016).

In light of these statistics, governments, policy makers, and scholars are left asking, what does this growth in e-commerce mean to government? In 2012 the national loss in state and local sales tax revenue due to e-commerce was estimated to be $12.65 billion and that

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Whitney Afonso Paper prepared for the 2017 Public Management Research Conference. Please do not cite without permission from the author.

was likely a conservative estimate (Bruce, Fox, and Luna 2009).2 Given the increase in ecommerce, this number has undoubtedly grown.3 While much of the loss in sales and use tax revenue is felt at the state level, local governments are also impacted. The growing importance of local sales taxes as a revenue source for local governments has brought more scholarly and practitioner attention and many have voiced concerns over whether they are equitable to different types of jurisdictions. The presumption has been that urban areas will generate more revenue at the expense of rural jurisdictions. Not only are urban areas more populous, they also benefit from being retail centers. These retail centers or agglomerations attract consumers from within the jurisdiction and from surrounding jurisdictions. The consumers from neighboring jurisdictions who shop in these urban areas are importing their sales tax dollars; this phenomenon is referred to as tax leakage. The relationships between urban and rural jurisdictions have been examined from multiple perspectives including the timing of adoption of local sales taxes and the revenue raising capacity of local sales taxes. In general, results of previous studies suggest that urban jurisdictions and others capable of exporting sales tax burdens are more likely to be early adopters of local sales taxes (Zhao 2005, Sjoquist et al. 2007, Burge and Rogers 2011, Burge and Piper 2012, Afonso 2016b) and have greater local sales tax revenue raising capacity (Zhao and Hou 2008, Cornia et al. 2010, Burge and Rogers 2011, Burge and Piper 2012, Afonso 2016a).

2 Approximately half of the revenue loss is associated with business-to-business transactions (Bruce, Fox, and Luna 2009). 3 Not all e-commerce transactions have gone untaxed. In fact, the majority of sales taxes owed to state and local governments are remitted. This is in part because businesses are more likely to remit use taxes than individual consumers are and they make up approximately 87 percent of ecommerce purchases (Whitacre 2011, Agrawal 2016, Agrawal and Fox 2016).

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Whitney Afonso Paper prepared for the 2017 Public Management Research Conference. Please do not cite without permission from the author.

This analysis begins with an overview of the relevant literature with regard to local sales taxes and e-commerce. Next, the competing hypotheses are discussed, followed by a discussion of the institutional context of the analysis. That is followed with a discussion of the data and methodology. The results are presented and the paper concludes with policy implications and conclusions.

Literature Review

There are two important sets of literature that inform this analysis. The first set examines the revenue raising capacity of sales taxes in local government. The second relevant stream of literature examines the relationship between e-commerce, consumer behavior, and sales taxes. This section provides an overview of both sets.

Local Sales Taxes and Revenue Raising Capacity

There is an increasingly robust literature that examines local jurisdictions' ability to generate local sales tax revenue. A common element of this research is whether localities are able to import tax dollars from non-residents and the majority of the literature finds that urban communities or those with regional retail centers are better positioned to have a tax surplus (Rogers 2004; Zhao and Hou 2008; Cornia et al. 2010; Burge and Rogers 2011; Burge and Piper 2012). Most scholars attribute this difference to tax leakage, where consumers from rural jurisdictions prefer to travel to urban jurisdictions or regional retail centers because of consumer preferences for retail agglomerations. For example, one study finds that, on average, urban jurisdictions generate $21 per capita more in local sales taxes than their rural counterparts and approximately ten times as much in total sales tax revenues.

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Whitney Afonso Paper prepared for the 2017 Public Management Research Conference. Please do not cite without permission from the author.

However, once factors like income and unemployment rates are controlled for, rural jurisdictions generate more revenue than both urban and suburban counterparts, though the classification that generates the most local sales tax revenue is tourism-rich (Afonso 2016a).4 Similarly, an earlier study of the equity of local sales tax revenue raising power found, using descriptive statistics, that local sales taxes do not exacerbate the level of fiscal inequality between urban and rural jurisdictions (Zhao and Hou 2008).

Tax exportation5 has been identified as an important factor in sales tax revenue generation and an important component of the ability to import sales tax dollars is the composition of neighboring jurisdictions. An element of tax exportation is cross border shopping. Consumers prefer shopping where there are retail agglomerations, but they also prefer shorter driving times (Burge and Rogers 2011). Therefore, a jurisdiction with limited retail options that is adjacent to a jurisdiction with a large shopping mall is expected to experience greater tax leakage than a jurisdiction surrounded by equally sparse jurisdictions. In addition to retail agglomerations, proximity to highways has been shown to be an important indicator of early local sales tax adoption because it suggests greater ability to export sales tax burdens (Zhao 2005, Sjoquist et al. 2007, Afonso 2016b). Lastly, being tourism-rich has been shown to be an important factor in sales tax revenue raising capacity (Afonso 2016a).

4 That study also examines the combined revenue raising capacity of local sales taxes and property taxes and finds no statistically significant difference in overall capacity between different classifications of jurisdictions. 5 "Tax exportation occurs when the economic incidence of a tax levied by one jurisdiction is at least partially shifted to individuals residing outside the tax jurisdiction" (Burge and Piper 2012, 394).

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Whitney Afonso Paper prepared for the 2017 Public Management Research Conference. Please do not cite without permission from the author.

This analysis adds to the literature by examining the effect of e-commerce on sales tax revenues on local governments. E-commerce is a critical component of modern revenue raising capacity discussions because if consumers prefer to minimize driving times and maximize shopping options, the internet is an important opportunity to optimize both of these preferences and often it presents lower prices.6 In many states, an additional dimension may incentivize consumers to go online to do their shopping: tax avoidance. While citizens are obliged to remit use taxes for their online purchases, shopping online presents an opportunity to avoid taxation for online purchases and may distort choices and create inequities. These inequities arise between citizens with access to online shopping and those without access and between retailers operating in traditional storefronts and their electronic counterparts. "From the viewpoint of both economic efficiency and fairness, it simply makes no sense to tax sales by local producers and vendors and not tax sales by their out-of-state competitors" (McLure 2002, 493).

E-Commerce and Sales Taxes

E-commerce vendors have historically not been responsible for collecting sales taxes unless the seller is physically located in the state; this is often referred to as the brick and mortar requirement. This stems from the Supreme Court's 1992 decision in Quill Corp v. North Dakota which clarified the requirements set in National Bellas Hess, Inc v. Department of Revenue, Ill.. North Dakota, at the time, contended that modern sales methods rendered the physical presence test established in National Bellas Hess obsolete (Gordon 2010). The

6 There is evidence that goods are less expensive online and not simply because of tax avoidance (Tabuchi and Russell 2016).

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