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Sales Taxes and Internet Commerce

Apr 2012
Working Paper
11-012
By  Liran Einav, Dan Knoepfle, Jonathan Levin, Neel Sundaresan
We estimate the sensitivity of Internet retail purchasing to sales taxes using data from the eBay marketplace. Our Örst approach exploits the fact that seller locations are revealed only after buyers have expressed interest in an item by clicking on its listing. We use millions of location ìsurprisesîto estimate price elasticities with respect to the e§ective sales tax. We then use aggregated data to estimate cross-state substitution parameters, and substitution between o­ ine and online purchases, relying on the variation in state and local sales taxes, and on changes in these rates over time. We Önd substantial sensitivity to sales taxes. Using our item-level approach, we Önd a price elasticity of around -2 for interested buyers. Using our aggregate approach, we Önd that a one percentage point increase in a stateís sales tax increases online purchases by state residents by just under two percent, but decreases their online purchases from home-state retailers by 3-4 percent.