Digital Sales Taxes: The Effects of Mandatory Collection by Foreign Digital Platforms

• In Event: Byte Me: Taxing the Digital Frontier

Abstract

This paper examines how digital sales tax collection by foreign digital platforms affects pricing and competition among individual vendors. In July 2021, Canada imposed a new digital sales tax in accordance with the OECD’s Base Erosion and Profit Shifting Action 1. The tax was imposed on foreign digital platforms instead of on domestic vendors (like a traditional sales tax would be). We document that vendors impacted by the digital sales tax significantly decrease their prices after the implementation, relative to unaffected vendors. We find that these price reductions are more pronounced in markets with highly elastic demand where consumers have more substitutes and vendors are under greater pressure to remain competitive. However, the price decreases are not to the full extent of the tax, suggesting that consumers bear some of the economic incidence of the digital sales tax. We also find that impacted vendors de-list from the digital platform to a greater extent than unaffected vendors, decreasing consumers’ options. Consistent with the concerns of policymakers and business groups, our results document a significant impact of digital sales tax beyond the digital platforms that bear the statutory incidence. Our results provide valuable insights for policymakers considering digital tax reforms in the ever-evolving digital economy.

Authors

• Jillian Adams, University of Tennessee, Knoxville

• Michael Marin, michael.marin@utoronto.ca