The Impact of Sales Tax on Internet and Catalog Sales: Evidence from a Natural Experiment

Abstract

This paper studies the effect of sales tax changes on internet and catalog sales. We collect sales data from a retailer that sells its products through its internet and catalog channels. We analyze the retailer’s sales before and after a major tax cut in one of the largest metropolitan areas in the U.S. This natural experiment allows us to separate the effect of the tax cut from the effect of other confounding factors. The results from our panel data analyses indicate that remote sales have decreased by about 15 percent in response to a four percentage point decrease in sales tax. Our results are statistically significant and highly robust. Interestingly, we also find that the effect of the tax cut varies across different types of consumers, products, and channels. These findings have important managerial and public policy implications.

Keywords: Electronic Commerce, Internet Sales, Sales Tax, Price Elasticity

JEL Classification: H71, K34