It’s only common sense that introducing taxes to the unregulated wilderness of online retail would make a few more shoppers avoid the Amazon checkout button. After all, who wants to spend more on a product that might now cost as much as the same one housed in the brick-and-mortar down the street? But Ohio State University doctoral student Brian Baugh along with Economics Professor Itzhak Ben-David and fellow student Hoonsuk Park decided to find exactly how much the average netizen would back off from newly-taxed goods sold on the net. In The Amazon Tax: Empirical Evidence from Amazon and Main Street Retailers, the trio studied the buying habits of three million households purchasing Amazon goods between 2012 and 2013 in the states of California, New Jersey, Pennsylvania, Texas, and Virgina — states that implemented “Amazon Taxes” to help out local retailers and grease their own cash influx.
Not only did the report’s findings confirm the obvious, but painted a dour picture for online retailers caught in the state government’s crosshairs: consumers decrease their spending by 15.5% on purchases larger than $150, and by 23.8% on purchases equal to or larger than $300. The conversation is only escalating, as The Marketplace Fairness Act of 2013, which would enable all states to collect taxes made from out-of-state retailers, was recently approved by the Senate is being debated by the House of Representatives.
2Checkout reached out to Baugh to get some background on the study and what he thinks it will mean for the future of e-commerce.
It makes sense that online merchants that don’t charge tax would receive greater sales. Did it surprise you that it played such a massive role, though?
I’m not very surprised. People are smart. When presented with a relatively costless opportunity to continue to dodge taxes, such as hopping onto Amazon marketplace or ebay, it’s a quick way of saving money; particularly for larger purchases.
What was the most shocking thing you found from your research?
Perhaps the one major critique with our paper is that nothing is really surprising. If taxes are collected, the total price to consumers goes up, and thus demand goes down. I learned this on day one of my first economics course. When I explained this finding to my 7- and 5-year-old daughters, they looked at me as if to ask why I had wasted my time on addressing such an obvious question.
I guess my response is that we are the first to quantify the result. We estimate an elasticity of -1.3, meaning that for every 1% increase in sales tax results in a 1.3% reduction in sales. Everyone in the world (including my daughters) has the intuition that taxes matter, but we haven’t really had a good estimate of how much they matter.
Why do you think tax play such a pivotal role in consumer psychology?
Taxes are just as relevant of a cost as the sticker price of an item. I think that consumers only care about them to the extent that they affect total sales price.
How much do taxes level the playing field between online and retail?
I think that online tax collection levels the playing field between the online operations of major brick and mortar stores (walmart.com, costco.com, etc) and Amazon. The online operations of brick and mortar stores have always been taxed, so there was already a level playing field (from a tax standpoint) to traditional brick and mortars.
How can online businesses compensate to the negative influence of taxes?
Historically, Amazon and Overstock have vehemently avoided sales tax collection. In 2012, both of them dropped their affiliate programs in the state of California to avoid sales tax. I suppose if other retailers wanted to avoid sales tax, both Amazon and Overstock have proved that this is an effective strategy. The Marketplace Fairness Act of 2013 proposes a $1M annual sales threshold, below which the retailer is not required to collect sales tax. Another organizational strategy to avoid being subject to this law is simply to stay under $1M in sales.