Working Paper: NBER ID: w23361
Authors: Jean-François Houde; Peter Newberry; Katja Seim
Abstract: We quantify the distortionary effects of nexus tax laws on Amazon’s distribution network investments between 1999 and 2018. We highlight the role of two features of the expansion of Amazon’s network: densification of the network of distribution facilities and vertical integration into package sortation. Densification results in a reduction in the cost of shipping orders, but comes at the expense of higher facility operating costs in more expensive areas and lower scale economies of processing shipments. Nexus laws furthermore generate additional sales tax liabilities as the network grows. Combining data on household spending across online and offline retailers with detailed data on Amazon’s distribution network, we quantify these trade-offs through a static model of demand and a dynamic model of investment. Our results suggest that Amazon’s expansion led to significant shipping cost savings and facilitated the realization of aggregate economies of scale. We find that abolishing nexus tax laws in favor of a non-discriminatory tax policy would induce the company to decentralize its network, lowering its shipping costs. Non-discriminatory taxation would also entail lower revenue, however, as tax-inclusive prices would rise, resulting in a fall in profit overall. This drop and the decline in consumer welfare from higher taxes together fall short of the increases in tax revenue and rival profit, suggesting that the abolishment of nexus laws would lead to an increase in total welfare.
Keywords: Nexus Tax Laws; E-commerce; Amazon; Fulfillment Centers; Distribution Network
JEL Codes: H71; L23; L81
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| nexus tax laws (K34) | Amazon's distribution network investments (D39) |
| Amazon's distribution network investments (D39) | shipping cost savings (L87) |
| abolishing nexus tax laws (H29) | decentralization of Amazon's network (D85) |
| decentralization of Amazon's network (D85) | lower shipping costs (L87) |
| decentralization of Amazon's network (D85) | lower revenue (H27) |
| higher taxes (H29) | decline in consumer welfare (F61) |
| nexus policy (F55) | decrease in total welfare (D69) |