In a world without borders: The impact of taxes on Internet commerce

The rapid rise in sales over the Internet and the fact that most Internet b uyers pay no sales tax has ignited a considerable debate over taxes and the Internet. This paper uses new data on the purchase decisions of approximat ely 25,000 online users to examine the effect of local sales taxes on Inter net commerce. The results suggest that, controlling for observable characte ristics, people living in high sales taxes locations are significantly more likely to buy online. The results are quite robust and cannot be explained by unobserved technological sophistication, shopping costs, or other alter native explanations. The magnitudes in the paper suggest that applying exis ting sales taxes to Internet commerce might reduce the number of online buy ers by up to 24 percent.