Sales Tax Avoidance Worth Billions to Online Retailers

 

You’re shopping for an iPhone 7. You find it for the same price both at Best Buy and on eBay – but the eBay seller isn’t charging sales tax. Which “buy” button will you click?

For years, brick-and-mortar retailers have complained that Internet-only stores have an unfair advantage. Thanks to a 1992 Supreme Court ruling, they don’t have to collect sales taxes in states where they don’t have a physical presence. Several Congressional bills have threatened to plug that loophole, but none have passed — in part, says McCombs Assistant Accounting Professor Brady Williams, because it’s been unclear how much e-tailers actually gain from it.

explanation of the "What's the Use of a Use Tax?" But in a new paper in the National Tax Journal, Williams has put the first price tag on what sales tax avoidance is worth to online stores: at least $14.5 billion.

His findings offer ammunition for new laws to level the selling field. “Prior to this, there have just been a lot of ideological debates,” he says. “This offers objective, empirical evidence that e-tailers have been enjoying a competitive advantage.”

But they also support the warnings of e-tail-only websites about killing their golden geese. “If any of these federal proposals were to pass, they’d be catastrophic for certain business models,” says Williams. He notes that 92 percent of eBay transactions are between parties in different states, over an average distance of more than 1,200 miles.

The Cost of a Competitive Edge
To measure e-tailers’ sales tax advantage, Williams asked a simple question: How would Wall Street react if they lost it?

A good indication, he reasoned, might be how investors reacted to the mere threat of losing it. Proposed laws like the Marketplace Fairness Act, introduced in 2013 and again in 2015, would let states require all online retailers, no matter where they’re based, to collect sales tax when selling to customers in those states. Had those bills affected stock prices for companies like Amazon?

With colleagues Jeffrey Hoopes of Ohio State and Jacob Thornock of the University of Washington, Williams looked at stock returns around dates for eight crucial pieces of retail tax legislation: days they were filed, heard in committees, or voted on between 2010 and 2014.

“We look at the stock market as an information aggregator,” Williams says. “If there’s a possibility these bills might pass, the stock prices could change for e-tailers.”

They did. Compared to storefront retailers, online sellers averaged negative returns of 0.43 percent for each of the 10 key legislative dates. It added up to $1.45 billion a day in lost market capitalization.

Williams found similar patterns when he examined analysts’ earnings forecasts. On average, they had dropped their long-term projections for Internet merchants 1.7 percent each time a bill was introduced, discussed, or voted on that might change the tax regulations for e-tailers.

Their predictions are striking, he says, because analysts don’t usually dig into complex tax issues. “Here, taxes were incredibly salient to the top line, so analysts were following them closely.”

E-tail Losses Aren’t Retail Gains
Though Internet vendors took hits, the value did not necessarily flow to their brick-and-mortar rivals, Williams notes. Their returns saw no corresponding rise around the same dates, compared to the rest of the market.

“We’d have loved to be able to say that $14.5 billion disappeared from e-tailers and showed up in retailers, but we didn’t see that,” he says. He suspects it’s because any possible gains were dispersed among a wider group of firms: 288 traditional retailers in his sample, versus only 39 online ones.

Text: Brady Wiliams asks, How would Wall Street React if they lost it?But that’s his only good news for Internet merchants. Williams regards his figure as a minimum damage estimate, which could run higher if one of the bills actually became law. The Marketplace Fairness Act passed the Senate in 2013 before dying in the House.

Some online giants, he notes, are already bracing themselves for such an outcome. After years of fighting sales taxes state by state, Amazon.com switched to lobbying for the Marketplace Fairness Act. Williams suspects that the giant felt singled out by state governments, whereas a federal law would affect its whole industry. He reasons that Amazon likely assumes “if it hurts us, it hurts our competitors more.”

“A lot of people in online businesses feel like the writing’s on the wall,” he adds. “A lot have told me, ‘We need to figure out how to adjust our business strategy so that we’re not strictly competing on price.’ If their price gap is based on a lack of collecting sales taxes, it’s probably not a sustainable model.”

Does Use Tax Evasion Provide a Competitive Advantage to E-tailers? is published in the National Tax Journal.

 

 

Faculty in this Article

Brady Williams

Assistant Professor, Accounting

Brady Williams received his Ph.D. in accounting from the University of Washington and his master's in accounting from Brigham Young University...

About The Author

Steve Brooks

In a quarter-century as a journalist, Steve Brooks has won two Neal awards for excellence in trade reporting and a Press Club of New Orleans award...

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