Economic Consequences of Expanding Sales Tax Nexus: Evidence from Stock Price Reactions to the Wayfair Decision

Abstract

We analyze stock price reactions to the announcement of the United States Supreme Court decision in South Dakota v. Wayfair, Inc., Overstock.com, Inc., and Newegg, Inc. (hereafter Wayfair), which overturned over 25 years of judicial doctrine related to sales tax nexus. Wayfair's precedent provides a broadening of sales tax nexus and a significant increase in affected firms' compliance costs. Stock returns surrounding the Wayfair decision were, on average, negative, suggesting that investors were concerned about an increase in compliance costs and a decrease in market share. Cross-sectional analyses suggest that the negative reaction manifested primarily among firms operating in industries most affected by the decision and firms with fewer resources. Our results reveal an immediate consequence of the prospect of expanding sales tax nexus is a downward revision in firm valuations.

Keywords: Compliance Costs; Event Study; Market Reaction; Nexus; Sales Tax; Taxes; Wayfair

JEL Classification: H25, H71