Sales Tax: When ‘Animal Farm’ Meets the Metaphysical World of the Internet

"The Amazon Tax: Empirical Evidence from Amazon and Main Street Retailers," a study by three researchers at The Ohio State University, is sometimes touted as proof that the Amazon tax will severely damage companies like Amazon. The researchers found that households in California, New Jersey, Pennsylvania, Texas and Virginia reduced Amazon expenditures by 9.5 percent in response to the Amazon tax. However, this decrease was offset by a 2 percent increase in purchases at local brick-and-mortar retailers and a 19.8 percent increase in purchases with competing online retailers. For high-ticket items (over $300), the research found that consumers were even more likely to shift purchases from Amazon to other merchants.

The study concluded that taxing online businesses like Amazon "will lead to an increase in the online sales of national retailers while only modestly increasing local brick-and-mortar revenues." Brick-and-mortar businesses will still face disadvantages vis-à-vis online merchants who bear less overhead. There are several issues and takeaways from this study that need to be highlighted:

First, the researchers conducted this study in close proximity to the introduction of the Amazon Law, looking at a 12-week window in each state. Therefore, the data doesn't factor in the natural lag between the introduction of legislation and a company's response, such as adaptation to new price sensitivities. Indeed, Amazon is investing heavily in a supply chain network that will take some time to implement and will compensate for higher prices with faster delivery.

Second, the taxes didn't detract from online commerce in general. Rather, they only hurt Amazon. To the contrary, consumers remained online but shifted their focus to other e-commerce retailers (some of which might have collected sales taxes themselves). So what the study really managed to prove was that online consumers are price sensitive. Ease of search means that store loyalty gives way to price preference.