Destination taxation and evasion: Evidence from U.S. inter-state commodity flows

- We examine how the movement of commodities is affected by sales tax evasion.
- High sales tax rates reduce cross-state sales.
- Effects of high rates fall with distance as the tax is less enforceable.
- Evidence of evasion is found in cross state sales.
- Evasion of destination taxation alters production and sales patterns.

Tax evasion has been an important issue in the accounting literature for several decades, but the focus has been on corporate income taxes. We develop a new way to examine tax evasion that focuses on corporate transactions, rather than corporate profits. Specifically, we examine how commodity flows respond to destination sales taxes, allowing for tax evasion as a function of distance between trade partners. After accounting for transportation costs, we find that the effect of taxes decreases as distance increases. This is consistent with the notion that longer distances between trade partners hinder government oversight and increase the likelihood of successful tax evasion. Our results are robust with respect to outliers, strategic neighbor effects, information sharing agreements and other re-specifications. These results are important to policymakers because they evidence the difficulty of enforcing destination taxation in open economies such as U.S. states and the European Union.