MN retailers will get a little boost from ‘Amazon Tax’

It’s still unclear what Amazon is up to that warrants it to begin collecting sales tax from Minnesotans.

The company will create some sort of brick-and-mortar presence in the state, which is the standard by which Minnesota decides whether an online business has to collect taxes. It could be a big operation, it could be much smaller. In Massachusetts last year, the company started collecting taxes from that state’s residents for purchases because it opened a research office.

Minnesota’s politicians, like counterparts in other states, have given a pass to Internet retailers on collecting taxes — technically, we’re supposed to pay the sales taxes directly to the state, but it’s unlikely many people do (about 0.2 percent if Rhode Island is any indication) — because the Internet was once a small player in retail. But now there’s Amazon and everybody else.

What Amazon intends to do in the state is less interesting that what collecting taxes will do to online retailing and, more importantly, to the brick-and-mortar stores who’ve been complaining for years that customers checked out items in their stores, then went online and gave their business to Amazon.

A recent research paper (pdf) has the answer to that.

Brian Baugh, Itzhak Ben-David, Hoonsuk Park of the National Bureau of Economic Research, studied California, New Jersey, Pennsylvania, Texas, and Virginia — states that began collecting sales taxes in the last few years from Amazon.

They found that revenue from sales on Amazon dropped 9.5 percent in states that began charging “the Amazon Tax,” as the researchers called it, and total sales from consumers dropped nearly 3 percent.

Sales of more expensive items dropped by 15.5 percent for items worth more than $150 and 23.8% on items worth more than $300.

Where does all the business go?

We document a 19.8% increase in purchases at the online operations of competing retailers. We also find a 2.0% increase in local brick-and-mortar expenditures at these retailers.

When we look at large purchases, the substitution effect is more pronounced. For purchases over $300, we find a 23.7% increase in purchases at other online retailers and a 6.5% increase in purchases at local brick-and-mortar retailers.

When we look at the sales of Amazon Marketplace merchants, who are generally not subject to the Amazon Tax, the large sales (≥$300) of these retailers increase by 60.5% after the tax goes into effect.

We conclude that to a small degree, the tax legislation achieved its objective of restoring retail activity to local communities, though most of the gains in “leveling the playing field” are garnered by the online operations of retailers.

The study might be fodder for political debate in states like Minnesota, which have so far resisted local retailers’ arguments that the “Amazon Tax” will put them on a competitive footing with online retailers.

Yes, Amazon is currently king of that sphere. But the study shows that people will mostly take their purchases somewhere else online, but will spend more money locally.

Proponents of taxing all Internet sales have some ammunition to show what would probably be a significant local impact of doing so, even if most of that money would likely go to big chains.

  • Tyrel
  • Jack

    Any chance that there was litigation pending with the state of Minnesota? Amazon has a history of opening some type of facility in an amnesty move with other states.

    Maintaining inventory for same day shipment is a very expensive move and sends them down the bricks and mortar road.

    Or did they figure that the Marketplace Fairness Act was gaining speed?

  • Keith Yockey

    Oh how we love numbers to prove one side’s position.
    First, online makes up less than 8% of all retail sales.
    83% of online sales are made up by the BigBox.coms (WalMart, BestBuy, Target, and Amazon in 23 Sates) that collect Sales Tax now!
    NCSL (National Council of State Legislators) uses a flawed U of TN studay that claims $23B in taxes goes uncollected. What they don’t tell you is the study assumes no taxes were collected; and also 50% of those numbers are remote sales that are not traditional retail store sales (autos, personal sales and B2B sales)
    What is leftover that is not collected? It’s less than $4B, not the $14B or $23B NCSL claims.
    Certianly some consumers flock to find a cheaper price. Don’t you travel an extra 5 miles to buy gas $.02 cheaper? Which is cheaper? That $400 B&M item, or the $350 item online? Even with Sales Tax, the online price is still cheaper.
    So much for the “TAX THE INTERNET TO SAVE Ma & Pa stores.” argument.