IN A WORLD WITHOUT BORDERS: THE IMPACT OF TAXES ON INTERNET COMMERCE University of Chicago, G.S.B., Current Version: November, 1998 The rapid rise in sales over the Internet has generated debate over the taxation of such transactions since the buyers usually pay no sales tax. This paper uses new data on the purchasedecisions of approximately 25,000 online users to examine the effects that local sales taxes haveon Internet commerce. The results show that, controlling for many observable characteristics,people who live in locations with high sales taxes are significantly more likely to buy things overthe Internet. The estimated tax responsiveness of both participation and spending are large andresemble the tax effects found in previous research on retail sales in geographic border areas. Theresults are quite robust; the tax sensitivity is clear nationally, within regions, within states, andeven within metropolitan areas. Further results suggest that the tax effect cannot be explained byunobserved heterogeneity across cities. The magnitudes in the paper suggest that to applyexisting sales taxes to Internet commerce would reduce the number of online buyers by 25% andspending by more than 30% with some specifications suggesting even larger effects.I wish to thank David Gross, James Hines, Pete Klenow, Steve Levitt, Casey Mulligan, JoelSlemrod, Michelle White, Alwyn Young, Jonathan Zittrain and seminar participants at theUniversity of Chicago and the University of Michigan for helpful discussions.ഊ21. IntroductionThe extraordinary growth of the Internet in the last few years, from fewer than 5 millionusers in 1993 to 62 million in 1997 (Department of Commerce, 1998), has led some to speak ofthe birth of a “world without borders,” where free communication, competitive markets, andextensive comparison shopping are a matter of course (see The Economist, 1997a; Hof, 1998;Pouliot, 1998). This apparent lack of geography in cyber...
