Friday, August 31, 2012

Online purchases and state use taxes

Most countries by now have some sort of consumption tax. In the United States, this is a state-level tax collected at the retailing point, a sales tax applied in most states. This intention is to apply the sales tax to the state's residents, not its retailers. Purchases made in other states need thus to be taxed in some way, and this is typically done in the annual income tax return by filing a use tax form. Very few people keep track of their cross-state purchases, and even fewer comply with the filing. Does the same apply to online purchases?

James Alm and Mikhail Melnik use data from eBay and find that 94% of all purchases are cross-state. What they should do is compare this with the probability that a purchaser who does not take into account the state of sale. With such a random matching, my rapid calculations give 95.7% (I included the District of Columbia). Thus 94% indicates that eBay buyers do have a preference for the home state, unlike what the authors state. A missed opportunity for the authors who then make a strange statement: "The average state online contribution is 1.66 percent of all purchases on" I could have sworn that there are 50 states, and thus each one's average contribution would be 2%.

The paper does not get better after that. We learn that the correlation between state population and sale volume is close to one. One somewhat interesting number is the share of sales tax potentially attributable to eBay, 0.43%. That number is an extrapolation from the consumer electronics sales on a single day in 2007, thus quite uncertain (also because the same sales tax rates was used for all states). The author claim this number is small. When you consider that eBay represents one eighth of online sales, revenue from use tax should be about 3.3% of sales tax revenue. Not negligible. But Alm and Melnik do not bother looking up actual use tax revenue. Too bad.

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