The Impact of Taxes on the Internet

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IN A WORLD WITHOUT BORDERS: THE IMPACT OF TAXES ON INTERNET COMMERCE* AUSTAN GtoOLSBEE The rapid rise in sales over the Internet and the fact that most Internet buyers pay no sales tax has ignited a considerable debate over taxes and the Internet. This paper uses new data on the purchase decisions of approximately 25,000 online users to examine the efFect of local sales taxes on Internet commerce. The results suggest that, controlling for observable characteristics, people living in high sales taxes locations are significantly more likely to buy online. The results are quite rohust and cannot be explained by unohserved technological sophistication, shopping costs, or other alternative explanations. The magnitudes in the paper suggest that applying existing sales taxes to Internet commerce might reduce the number of online buyers by up to 24 percent. I. INTRODUCTION The extraordinary growth of the Internet in the last few years has led some to speak of the birth of a world without borders, a place where free communication, competitive markets, and extensive comparison shopping are a matter of course (see The Economist [1997a] and Hof [1998]). This apparent lack of geography in cyberspace, however, has raised some diflScult problems regarding government policy, especially tax policy, toward the "new" economy. Although online transactions currently make up only a very small fraction of total retail sales, predictions of astounding future growth have caused state policy makers to become highly concerned about the fact that most online transactions pay no sales or use tax.i Since the sales tax makes up the largest single component of state tax revenue, the growth of Internet commerce * I wish to thank Shane Greenstein, David Gross, James Hines, Peter Klenow, Steven Levitt, Charles McLure, James Poterha, Joel Slemrod, Michelle White, Alwyn Young, Jonathan Zittrain,

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