Consequences of Employment Protection

Internet sales are highly sensitive to local taxation. People who live in high sales tax locations are significantly more likely to make purchases over the Internet.

While Internet use has surged from fewer than 5 million users in 1993 to more than 62 million in 1997, sales of products and services on the Internet has grown even faster, rising approximately 300 percent annually. Analysts estimate online sales in the year 2000 will be between $200 billion and $1 trillion.

Even though on-line sales represent only a fraction of total retail sales, they are attracting significant attention as targets for sales taxes, which represent the largest single component of state revenues.

In A World Without Borders: The Impact of Taxes on Internet Commerce (NBER Working Paper No. 6863) , NBER Faculty Research Fellow Austan Goolsbee examines the purchase decisions of approximately 25,000 online users in more than 350 cities and metropolitan areas to estimate how the introduction of sales taxes would effect Internet commerce.

Goolsbee shows that Internet sales are highly sensitive to local taxation. People who live in high sales tax locations are significantly more likely to make purchases over the Internet, exhibiting purchase decisions similar to consumers who live in geographic border areas with different tax structures. This pattern holds true nationally, within regions, within states, and even within metropolitan areas. Since people living in high tax locations do not use the Internet more, do not own more computers, and are not more technologically sophisticated than those living in low tax locations, Goolsbee concludes that the relationship between Internet purchases and high tax areas is motivated by the desire to save money.

He also concludes that applying existing sales taxes to the Internet could reduce the number of online buyers by 25 percent and online spending by 30 percent or more. Since current online sales constitute only a fraction of total retail sales, the revenue loss from not applying taxes is small, thereby allowing the fledgling online commerce industry to grow and stabilize. However, if predictions about the future growth of online commerce are correct, the potential tax revenue loss could eventually be very large. This is of concern to states, which generally are not able to collect sales or use taxes from out-of-state mail-order companies or Internet companies and has generated considerable debate in Washington.

-- Lester A. Picker