Sales taxes and the internet

Date posted: February 5, 2014

There is an ongoing debate about sales taxes and whether they should be applied to online sales as well as to sales at traditional stores. To what degree does this matter when it comes to how people shop? N.C. State University economist Mike Walden answers.

“We have thought — economists have for a while — that it does matter and does have an impact. But now we have some new research published in the very prestigious American Economist Review that gives us some numbers on this.

“The problem is … for many people if they go online and buy something, they are going to escape sales taxes on that purchase, which then puts added pressure on states — most states derive a very significant part of the revenues from the sales tax — to potentially increase their sales tax rate on what I am going to call brick-and-mortar stores, traditional stores. But the issue there has been, Is that just going to exacerbate the problem? As taxes on brick-and-mortar stores goes up, is that simply going to drive more people to buying on the Internet, where in many cases they can simply escape those sales taxes?

“And this new research indicates, yes, and gives us some numbers on it. Let me give you the numbers. What this research found is that for every one percentage point increase in a state’s sales tax that is, first of all, going to reduce purchases in that state from traditional retailers, brick-and-mortar retailers, I call them, by 3 to 4 percent, at the same time increasing online purchases by about 2 percent.

“So what this indicates clearly is there is competition between online sellers and traditional sellers, and we really have to address and solve this problem or we are going to see this competition continue.”

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