Failure to launch: Measuring the impact of sales tax nexus standards on business activity

Abstract We present the first empirical analysis of the relationship between sales tax collection obligations, or nexus, and business activity. The recent Supreme Court decision in the Wayfair case upended the long-standing physical presence requirement for sales tax nexus, and opened the door for states to enforce sales tax collection obligations on remote sellers that have sufficient economic presence in the buyer’s state. In an effort to inform the ongoing policy discussion, we make use of state-level panel data to explore the extent to which changes in sales tax nexus were associated with changes in firm activity between 1979 and 2014. Our results suggest that increasing sales tax base breadth by 1 percentage point generates 0.14 percent additional firms and establishments and 0.2 percent higher employment levels. Furthermore, increasing the share of online companies with nexus by 1 percentage point translates into 0.1 percent additional (small) firms as the sales-tax-collection obligation is dispersed among a larger share of firms. Results from a simulation show that unwinding half of the observed base narrowing could have generated as many as 90,350 firms, 113,600 establishments, and 2.9 million jobs during the time period. These results provide suggestive evidence of the future impact of sales tax base recovery that will result from more neutral nexus standards in the post-Wayfair world.