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

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 Please do not cite without permission from the author.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 Please do not cite without permission from the author.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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