Tax (dis)incentives

A recent MIT study by two professors at the institute's Sloan School of Management found that a sales tax can decrease online purchases by more than 15%. The study focused on online retailers who were compelled to levy a sales tax when they decided to have a physical presence via a store in the state. The paper entitled How does an Obligation to Collect Sales Tax Affect Consumer and Firm Behavior? has important public policy implications not just for sales tax but also the infamous hotel tax that jurisdictions around the country are quick to tack on based on the (mistaken) notion that it is has no local implications.

The MIT study found that "for retailers who have not yet established a physical presence in
high-tax states, the sales tax obligation is a significant deterrent to
do so. The higher the tax rate, the more you may want to avoid that
state because the bigger the effects on sales will be. Retailers that do a large percentage of business through remote
channels like the Internet will stay away from high-tax states. A telling example was that of Gateway Computers which closed all retail stores in part because of the requirement to charge sales tax for online sales. Not only did the state lose out in terms of its citizens being compelled to buy more expensive computers but also jobs from the closure of the physical outlets.

State, city and townships looking to continue to float bloated bureaucracies from the credit binged times of the recent past via hotel tax revenues ought to realize that the out of town customer equally has a choice of destinations and very likely will devote their business to low tax destinations. New York which is on the verge of increasing the hotel occupancy tax ought to consider not only the MIT study but also the measures another similar city center destination, Hong Kong is considering – the abolition of the accommodation tax.

Published by

Vijay Dandapani

Co-founder and president of a New York based hotel company for 24 years. Grew the firm to five hotels in Manhattan and also developed a greenfield project at MacArthur airport, New York. Speaker at numerous prestigious forums including Economy Hotels World Asia, Lodging Conference, NYU, Columbia University Real Estate Roundtable, Baruch College's Zicklin School and ALIS. President and ceo of New York City Hotel Association since January 2017.

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