Impact of Amazon tax on Amazon sales..

Brian Baugh, Itzhak Ben-David and Hoonsuk Park have this interesting article in voxeu (based on a detailed paper earlier).

They point how sales tax on online retail leads to lower purchases by consumers. I mean the finding has obvious results but is still important to analyse. The analysis also shows how consumers shift purchases to brick-mortar stores (never liked the phrase):

Over the past decade, online retail transactions have increased dramatically in volume. Many factors have contributed to this growth in online sales, one of which is that out-of-state online retailers do not charge sales tax, which has generally given them a price advantage over retailers with a presence in the state. This sales tax collection loophole has not gone unnoticed by state governments or by competing retailers. Because the tax-advantage status of online retailers could reduce the demand for local retailers, state governments are concerned about depressed local employment and eroded income tax revenues. Many states have responded by adopting laws commonly referred to as an “Amazon Tax.” Though the laws are written generally to apply to all online retailers, Amazon is usually the only retailer to have been affected by such laws because it dominates the online retail space. Previous empirical work shows that consumers are sensitive to prices and to sales tax, especially in the online retail arena (e.g. Agarwal et al. 2013; Einav et al. 2014), yet little empirical evidence has been gathered about the effects of wide implementation of such a tax on online and brick-and-mortar retail. As more and more states begin to implement Amazon Tax laws, it is important to study their effects on the internet and local retail landscapes.

The findings:

Our study shows that Amazon experiences a decline of about 10% in sales following the implementation of an Amazon Tax. The decline in sales is sharper – above 23% for large purchases (above $300). This suggests that about 10% of Amazon’s sales (and 23% of large sales) were driven by a tax advantage over its competitors.

Furthermore, the fact that households reduce their shopping with Amazon indicates that indeed households do not voluntarily pay the use tax to their states.
We document that households substitute Amazon with other retailers. About half of substitution we observe takes place with brick-and-mortar big box retailers (e.g. Walmart). The rest of observed substitution is split between online retail arms of the big box retailers (e.g., and Amazon Marketplace. While the online retail arms of the big box retailers collect sales tax, Amazon Marketplace does not require sales tax collection in most cases. Due to data limitations, we are not able to measure the effect of the Amazon Tax on small mom and pop stores.

Overall, our study documents that online consumers are very sensitive to total prices, and showing that the implementation of sales tax hurt Amazon and benefited local retailers.

So, gains for the offline stores.

 Indian online retail is gearing up for competition as Amazon has really spiced the space. It will be interesting to see how the online retail space shapes in India. Will it be Amazon dominated otr Flipkart/Myntra will provide some competition. How will governments react to these developments? Time will tell..

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