E-TAILER SALES TAX NEXUS AND STATE TAX POLICIES

The growth in e-commerce has dramatically altered U.S. business practices in ways that erode states' ability to collect sales taxes. States have attempted to reclaim the sales tax base but are constrained by current nexus rules that allow firms to choose whether to establish taxability based on a decision to establish physical presence. We examine how state tax policies affect the propensity of firms to establish nexus in each state. We find that firms are more likely to have nexus in large states, and that the effect of policy on nexus decisions appears to be relatively immediate and a function of current sales tax rates and base breadth. Employment rises with nexus in states where the sales tax is low.