Who will gain from the South Dakota vs. Wayfair Inc. ruling?

The purpose of this paper is to consider which states will gain from the South Dakota vs. Wayfair Inc. (2018) Supreme Court ruling, which allowed US states to collect sales tax revenue on purchases from in-state consumers to out-of-state firms without a physical presence within the state. To do so, we develop a two-region trade model where firms are monopolistically competitive, and regions vary in their sales tax rates. We find that welfare for workers will rise if (1) regions have identical tax rates and transport costs are sufficiently high, (2) one region competes with another that does not utilize a sales tax and (3) if transport costs are sufficiently high and one region has a higher sales tax than its counterpart. If a region does not utilize a sales tax, then welfare for workers in that region unambiguously falls. Additionally, we consider how the policy change alters the Nash-equilibrium tax rates. Under both policies state governments choose a negative tax rate, however the rate is lower after the tax policy change. We find that the policy change is welfare improving, however the benefits decline with the elasticity of substitution between varieties.