on out-of-state mail-order sales, has explicitlyassumed that there are no behavioral impacts (ACIR, 1986).In this paper, I attempt to provide a rigorous empirical foundation for discussions ofInternet commerce by estimating how such commerce responds to local tax rates. To do so, Iturn to a major recent survey of the online purchase patterns of approximately 25,000 people withaccess to the Internet in more than 350 cities and metropolitan areas and match these data to thetax rates in those communities.7The results show that Internet sales are highly sensitive to localtaxation. This is true nationally, within regions, within states, and even within metropolitan areas.Controlling for individual characteristics, people who live in high sales tax locations aresignificantly more likely to buy over the Internet and I can show that this is unlikely to result fromunobserved heterogeneity across locations. The paper also uses data on purchases of computersto compare the apparent tax responsiveness of both Internet and mail-order sales and finds similareffects for both of the “non-taxed” channels.The estimated tax elasticities of Internet commerce with respect to local taxation are quitelarge and thus resemble the elasticities found in previous sales tax studies of geographical border6 Examples of such work include Mackie-Mason and Varian (1995), Downes and Greenstein (1998), and thepapers in McKnight and Bailey (1995).7 In accordance with the data, the results concern sales to consumers not to businesses.ഊ5areas. In policy terms, the results suggest that to apply existing sales taxes to Internet purchaseswould reduce the number of online buyers by 20-25% and spending by 25-30%. The largeelasticities estimated here raise important questions about long-run tax policy toward Internetcommerce.The paper proceeds as follows. Section II describes the data used in the paper and thegeneral approach. Section III presents the basic evide...
