Amazon Sales Take a Hit in States With Online Tax, and Other Predictable Outcomes
A newly published paper has confirmed the age old truism that people shop around for the best price
buy less as prices increase.
A team of researchers at Ohio State University have been studying the effects of online sales tax on consumer behavior, and they noted that consumers in states where online sales taxes are collected tended to spend less at Amazon than consumers in states where no online sales tax was due.
According to Bloomberg:
In one of the first efforts to quantify the impact of states accruing more tax revenue from Web purchases, researchers at Ohio State University published a paper this month that found sales dropped for Amazon when the online charge was introduced. In states that have the tax, households reduced their spending on Amazon by about 10 percent compared to those in states that don’t have the levy. For online purchases of more than $300, sales fell by 24 percent, according to the report titled “The Amazon Tax.”
You can find the paper here (PDF), but I’m not sure that there is really any need to read it.
That paper proves a basic theory of economics that we all learned in Econ 101, namely that demand goes down as prices increase. It’s called the demand curve, and that more than anything explains why Amazon fought the various state’s efforts to collect a sales tax on online sales. This money was never going to come out of Amazon’s pocket, so it wasn’t going to hurt them directly, but Amazon knew that the taxes would discourage sales.
Update: It looks like I wrote too soon. This isn’t an example of consumers spending less; they are just more choosy about where they are shopping. Here’s a telling quote:
When we look at the sales of Amazon Marketplace merchants, who are generally not subject to the Amazon Tax, the large sales (? $300) of these retailers increase by 60.5% after the tax goes into effect. We conclude that to a small degree, the tax legislation achieved its objective of restoring retail activity to local communities, though most of the gains in “leveling the playing field” are garnered by the online operations of retailers.
Overall, our study shows that Amazon experiences a decline in sales following the implementation of an Amazon Tax. Households substitute Amazon with other retailers: either online retailers who are exempt from collecting sales tax, or in-state retailers (online and brick-and-mortar).
I will read further, but one effect of the Amazon tax is to shift sales from Amazon to their Marketplace (where Amazon charges a commission). In other words, Amazon is still profiting from tax-free online sales.
And this still proves a lesson from Econ 101: consumers shop around for the cheapest price.
Gary April 22, 2014 um 3:32 pm
Nate, in your post you gave me the impression that sales in these states dropped. That is, if people couldn’t buy from Amazon, they didn’t buy at all.
The abstract of the paper, which I have included below, clarifies this. It says:
Several states have recently implemented laws requiring the collection of sales tax on online purchases. In practice, however, only Amazon.com has been affected. We find that households living in these states reduce Amazon expenditures by 9.5%, [Snip] Further, we find that the decline in Amazon purchases is offset by a 2.0% increase in purchases at local brick-and-mortar retailers and a 19.8% increase in purchases at the online operations of competing retailers.
So, forcing Amazon to collect sales tax has reduced sales at Amazon.com. The effect on total sales in these states is less clear.
Nate Hoffelder April 22, 2014 um 3:36 pm
Whoops. You’re right, I flubbed this one.
Only Amazon has been affected? That doesn’t make any sense.
Maria (BearMountainBooks) April 22, 2014 um 4:26 pm
It’s also not a one-to-one comparison. I used to shop a lot at Amazon, but in the last two years, their prices have gone up–and I can often find the item elsewhere for cheaper. This is BEFORE sales tax. And I do live in a state that has added sales tax for Amazon.
Ebook Bargains UK April 23, 2014 um 3:20 am
In January 2014 Amazon will lose its Luxembourg tax advantage re: ebooks. Currently Amazon gets away with charging just 3% VAT for ebook sales on Kindle UK because VAT is set at the rate where the product is delivered from.
Next year VAT will be set based on where the recipient customer lives, which will wipe out Amazon’s tax advantage over UK-based ebook stores like Waterstone’s, Sainsbury and Blinkbox.
Obviously Kindle customers cannot easily shift to other retailers even if the other retailers offer better prices, but it will at least level the playing field.