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How much do Amazon sales fall when it collects sales tax?

Posting in Technology

How much do online retailers benefit from not collecting taxes?

A new study from Ohio State University finds that in five states that began collecting taxes for online purchases, sales dropped 9.5 percent.  

To get at this, the researchers -- Brian Baugh, Itzhak Ben-David, and Hoonsuk Park from Ohio State’s Department of Finance -- looked at anonymous retail transaction data of roughly 1.3 million U.S. households using a personal finance website. The study tracked that data from 2012-2013 in five states -- Texas, Pennsylvania, California, New Jersey, and Virginia -- that began collecting taxes on online purchases during that time and compared spending before and after the policies went into effect. 

In those states, Amazon took its biggest hit from high-cost items. The study shows that consumers reduced spending on Amazon by 24 percent on items priced at $300 or more. 

But that doesn't mean all of that money is shifted back to local brick-and-mortar stores. 

"For the most part, consumers simply switched their spending to other online retailers that didn’t have to collect the tax," said Ben-David, in a press release. But Amazon still benefits since much of the spending for big items just shifts to Amazon's online marketplace, where smaller retailers pay Amazon a fee to offer their products. 

A separate, but related, study from Ohio State University found that stock prices for online retailers fell 0.7 percent more than expected on days when news came out about possible legislation requiring them to collect sales tax.  

Currently, online retailers are only required to collect taxes in states where they have a "physical presence." But that could soon be changing. Last year, the U.S. Senate passed the Marketplace Fairness Act allowing states to collect taxes from online retailers regardless of their physical presence in the state. Some are optimistic that it could also pass in the U.S. House.

But will this legislation really matter to brick-and-mortar retail? As Baugh explained to the New York Times, his research suggests, not as much as you might think. "This legislation is being pushed as a kind of savior to brick-and-mortar stores and a boon to local economies and it doesn't appear to be the case to me."

According to Forrester Research, online retail in the United States accounted for nearly nine percent of the $3.2 trillion total retail market in 2013. The research firm also projects a compound annual growth rate of 10 percent through 2018, as online spending per buyer is expected to grow.

Photo: Flickr/Luke Dorny

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— By on May 1, 2014, 10:54 AM PST

Tyler Falk

Contributing Editor

Tyler Falk is a freelance journalist based in Washington, D.C. Previously, he was with Smart Growth America and Grist. He holds a degree from Goshen College. Follow him on Twitter. Disclosure