The Effect of State Tax Policies on Where E- Tailers Collect Sales Tax

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. Policy Background • 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

3. What is Nexus?[nek-suhs] • 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

4. State Creativity • 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

5. 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? Study Overview

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).

7. Theoretical Motivation • 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

8. Link to Empirics • 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

9. Nexus Data • 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

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

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

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

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

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

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

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

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

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

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

20. Empirical Strategy • Would ideally consider firm-level decisions • We instead condense firm-level data to state-level aggregates for empirical work 𝑁𝑒𝑥𝑢𝑠𝑖,𝑡 = 𝛽0 + 𝛽1𝑆𝑃𝐼𝑖,𝑡 + 𝛽2(𝑆𝑃𝐼𝑖,𝑡∗𝑅𝑎𝑡𝑒𝑖,𝑡) + 𝛽3 ( 𝑆𝑃𝐼𝑖,𝑡∗𝐵𝑎𝑠𝑒𝑖,𝑡 )+ 𝛽4𝑅𝑎𝑡𝑒𝑖,𝑡 + 𝛽5𝐵𝑎𝑠𝑒𝑖,𝑡+ 𝛼𝑖+𝛾𝑡+𝜖𝑖,𝑡

21. Nexus Variables • 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

22. Control Variables • 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

23. Summary Statistics

24. Contemporaneous Models

25. Potential Concerns • 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

26. Nexus on Collections and Employment

27. Conclusions • 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.