The Internet as a Tax Haven?: The Effect of the Internet on Tax Competition

David R. Agrawal

University of Georgia - Department of Economics

September 1, 2013

Firms with a physical presence in a consumer’s state are required to collect state and local sales taxes on online sales; sales from remote vendors without a physical presence are not subject to sales tax collection. A large fraction of shoppers with Internet access will put downward pressure on tax rates as jurisdictions seek to reduce revenue leakage to a tax-free source; but it will put upward pressure on tax rates when the Internet acts as an effective means of enforcing sales tax collections on taxable online transactions. Using novel data – all municipal and county sales tax rates in the country and data on Internet penetration rates in 2011 – I demonstrate that having more residents with access to the Internet creates upward pressure on tax rates in small jurisdictions that have relatively few brick-and-mortar stores, but puts downward pressure on tax rates in larger jurisdictions. Intuitively, this heterogeneity arises because large municipalities are likely to have relatively more e-commerce on tax-free websites because taxable online vendors also have a physical presence in the city. An increase in the Internet penetration rate induces municipalities on the low-tax side of state borders to lower their tax rates by more than municipalities on the high-tax side; this result is consistent with towns on the high-tax side having less brick-and-mortar stores and more consumers with easy non-Internet means of tax avoidance. The results are robust to instrumenting for Internet penetration rates with the average flash density of lightning in each county.

Number of Pages in PDF File: 50

Keywords: Commodity Taxation, Fiscal Competition, e-Commerce, Tax Havens, Tax Evasion

JEL Classification: H25, H71, H73, L81, R50

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Date posted: September 21, 2013 ; Last revised: September 23, 2013

Suggested Citation

Agrawal, David R., The Internet as a Tax Haven?: The Effect of the Internet on Tax Competition (September 1, 2013). Available at SSRN: http://ssrn.com/abstract=2328479 or http://dx.doi.org/10.2139/ssrn.2328479

Contact Information

David Robert Agrawal (Contact Author)
University of Georgia - Department of Economics ( email )
Brooks Hall
310 Herty Drive
Athens, GA 30602-6269
United States
HOME PAGE: http://dagrawal.myweb.uga.edu/
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