Economic consequences of expanding sales tax nexus: Evidence from stock price reactions to the Wayfair decision

Abstract

We analyze investor reactions to the United States Supreme Court decision in South Dakota v. Wayfair, Inc., Overstock.com, Inc., and Newegg, Inc. (hereafter Wayfair), which overturned decades of judicial doctrine related to sales tax nexus. Wayfair's precedent provides a broadening of sales tax nexus and a significant increase in compliance costs. It also levels the playing field by requiring more firms without a physical presence to collect sales tax. We document negative stock market reactions surrounding the date the Supreme Court agreed to hear the case and the date the decision was announced for firms likely to experience increased compliance costs and a decrease in market share. In contrast, we observe positive market reactions for firms likely to benefit from states requiring firms lacking a physical presence to collect sales tax. Additional tests reveal that investments in auditor-provided tax and non-audit services increased, and the accuracy of analyst earnings forecasts decreased for firms most likely negatively affected by the decision. We also show that our sample firms identified as likely to be positively (negatively) affected by Wayfair experienced increased sales (operating costs) following the decision. Our results reveal that the court-induced expansion of the sales tax nexus doctrine significantly influenced investor perceptions of the costs and benefits for affected firms.