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Sales Taxes and the Decision to Purchase Online

March 1, 2005
By James Alm and Mikhail I. Melnik

This study, written by Georgia State University economics professor James Alm and Kennesaw State University associate professor Mikhail Melnik, examines the impact of states’ sales tax rates on consumers’ decisions to purchase goods online.

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This study, written by Georgia State University economics professor James Alm and Kennesaw State University associate professor Mikhail Melnik, examines the impact of states’ sales tax rates on consumers’ decisions to purchase goods online.

The likelihood of a consumer choosing to shop online, instead of at a physical store, is correlated with the consumer’s local sales tax rate, Alm and Melnik write.

“In all specifications, sales tax rate has a statistically significant and positive impact on the probability of purchasing goods online,” Alm and Melnik wrote. “The average magnitude of the marginal effect on the tax price […] can be interpreted as an increase in the probability of buying online that would result from a 1 percent decline in the tax price. Given the average magnitude of this marginal effect, we can conclude that an individual with average characteristics in the data set would increase the probability of purchasing online by 3.8 percent if he or she relocated from a jurisdiction with a 7.5 percent tax rate to one with a jurisdiction with a 0 percent tax rate.”

Internet shopping habits also vary with other factors, as consumers living in cities are more likely to shop online than consumers living in rural areas, they write.

“Individuals located in metropolitan areas are more likely to access the Internet and to use the Internet for consumption purposes than are their rural counterparts,” Alm and Melnik wrote. “Metropolitan status makes an individual nearly 4 percent more likely to access the Internet and nearly 2 percent more likely to purchase online. One of the arguments behind the growing retail use of the Internet is to help extend retail services from urbanized centers into rural areas. Furthermore, individuals located in urbanized areas are more likely to be exposed to a larger number of sellers engaged in traditional commerce and hence are more likely to find stronger competition for online sellers than individuals located in rural areas. These arguments suggest that rural individuals should be more likely to purchase online.”