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The Effect of State Tax Policies on Where E-Tailers Collect Sales Tax Donald Bruce, Professor of Economics William F. Fox, Professor of Economics LeAnn.

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Presentation on theme: "The Effect of State Tax Policies on Where E-Tailers Collect Sales Tax Donald Bruce, Professor of Economics William F. Fox, Professor of Economics LeAnn."— Presentation transcript:

1 The Effect of State Tax Policies on Where E-Tailers Collect Sales Tax Donald Bruce, Professor of Economics William F. Fox, Professor of Economics LeAnn Luna, Associate Professor of Accounting University of Tennessee – Knoxville, TN Center for Business and Economic Research

2 45 states with a sales tax States with sales taxes also have use taxes – due on taxable items purchased remotely A state can only require sellers with nexus to collect sales taxes Use tax compliance is very, very low Policy Background

3 Quill Corp. vs. North Dakota (504 US 298, 1992): – Physical Presence – How much and what type of “physical presence” is needed? Varies by state – Owning/leasing tangible property – Storing goods in public warehouse – Owning display racks – Shipping in-process inventory for processing – Using company-owned vehicles or third-party distributors – Having a local phone number, bank account, or P.O. Box – Out-of-state employees providing in-state services What is Nexus? [nek-suhs]

4 Affiliate or attributional relationships – Nexus of one entity can extend to affiliates “Amazon Laws” or click-through nexus – Small in-state sellers who receive commissions for having an Amazon link on their websites can create nexus for Amazon These efforts to assert nexus are being challenged in the courts State Creativity

5 Study Overview Questions: – How do state tax policies affect the propensity of firms to establish sales tax nexus in states? – How do nexus decisions impact revenues and employment? How: – We combine a database with operating data for the nation’s largest e-tailers (and aggregate to the state level) with a panel of state-level policy and economic date to estimate state-level regressions. Why e-tailers? 5

6 E-Commerce Key Stats $4.1 trillion – estimated total e-commerce for 2011 13.0% - annual compound growth rate since 2000. 92% - of all transactions are business to business, with the remainder business to consumer. 2/3 – of all e-commerce is in the manufacturing sector $11.4 billion - Estimated 2012 total state and local revenue loss (Bruce, Fox, Luna). 6

7 Representative firm decides whether to establish nexus in a state Depends on net impact of nexus on PROFITS – SALES might increase or decrease Home-state effect vs. “tax revolt” Sign depends on economic and tax structure – PRICES might increase or decrease Over-shifting vs. under-shifting of the tax Sign depends on economic and tax structure – TRANSACTION COSTS are likely to decline Tax collection costs offset by transportation cost savings Nexus is established when firms stand to gain profit through (a) quantity or price increases and/or (b) transaction cost savings Theoretical Motivation

8 Firm-level nexus decisions are likely to be impacted by state economic and policy environment – Sales tax rate – Breadth of sales tax base – Size of market (personal income) – Additional sales tax compliance costs – Other factors Link to Empirics

9 Internet Retailers Top 500 Guide Hand-collected data for large sample of online retailers (drawn for prior research projects) Indicators for whether sales tax was collected on a hypothetical order from each sales-taxing state 2006: 100 largest firms as of 2005 2008: 50 largest firms plus 50 others in Top 500 2010: Any firm in 2006 and 2008 data plus several more (total of 179) 2011: Slightly expanded to 182 firms 2012: Expanded to 297 firms Nexus Data

10 Amazon.com Inc. (#1) Nexus No sales tax 10 E-Sales $61,090,000,000

11 Walmart.com (#4) Nexus No sales tax 11 E-Sales $7,700,000,000

12 Dell Inc. (#8) Nexus No sales tax 12 E-Sales $3,900,000,000

13 Newegg.com (#14) Nexus No sales tax 13 E-Sales $2,800,000,000

14 L.L. Bean Inc. (#29) Nexus No sales tax 14 E-Sales $1,140,000,000

15 Lulu Lemon Athletica Inc. (#122) Nexus No sales tax 15 E-Sales $197,300,000

16 Harry and David Holdings (#132) Nexus No sales tax 16 E-Sales $171,900,400

17 National Geographic Society (#352) Nexus No sales tax 17 E-Sales $37,260,000

18 Weight Watchers Inter. (#61) Nexus No sales tax 18 E-Sales $486,400,000

19 eMusic.com, Inc. (#215) Nexus No sales tax 19 E-Sales $94,160,000

20 Would ideally consider firm-level decisions We instead condense firm-level data to state-level aggregates for empirical work, = 0 + 1, + 2 (, ∗, ) + 3 (, ∗, ) + 4, + 5, + ++, Empirical Strategy

21 Nexus 1: Count of companies with nexus in that state Nexus 2: Share of total web sales occurring at firms with nexus in that state Nexus 3: Nexus 2 pre-multiplied by that state’s share of total national state and local sales tax collections Nexus Variables

22 State Personal Income (SPI, in $b) State general sales tax rate (%) Sales tax breadth (collections/rate in $b) Streamlined Sales Tax Project “age” Amazon law indicator Corporate tax policies – Top tax rate, sales factor weight, and indicators for combined reporting, throwback, LLC/LLP withholding, and LLC/LLP entity-level tax Control Variables

23 Summary Statistics

24 Contemporaneous Models

25 Corporate policy may affect sales tax nexus – Include 8 additional control variables Policy endogeneity: nexus drives policy? – Try first-lagged models Spatial correlations: nexus in one state related to nexus in neighboring states – Try Spatial Autoregressive models “Amazon” effect for Nexus 2 – Drop state years with Amazon nexus – Include an indicator variable for Amazon nexus Potential Concerns

26 Nexus on Collections and Employment

27 Firms are more likely to establish nexus in large-market states (i.e., with higher SPI) The large-market effect falls as the sales tax rate rises or the base broadens Amazon laws have a lagged, positive effect on nexus Nexus increases total and retail employment Nexus increases revenues at amounts that rise with the sales tax rate. Conclusions


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