Taxing ECommerce

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Taxing E-Commerce

• By Jason Edghill

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Considerations

• Things to consider
• International boundaries or borders (where is the
  transaction taxed)
• How do I tax digital commodities
• Privacy
• Losses of government revenue
• Some believe imposition of taxes would slow the
  growth and opportunities of e-commerce, just
  before it gains a foothold among consumers.

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Problems

• Largely Internet purchases are not taxable.
• There is much ongoing debate about e-commerce
  taxation.
• Taxation regimes are difficult to implement on
  electronic purchases.
• Defining tax jurisdiction may be difficult.
• The Internet eliminates borders between countries
  making businesses virtually invisible

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Problems Contd

• Taxing the Internet may also drive away the
  dot.com to locations that do not tax them , if we
  impose taxes that reduce their business. Many of
  the companies that engage in commerce over the
  Internet do not have to be physically located in
  the United States.

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Interesting Studies

• In June 1999 study concluded that 63 of
  business-to consumer online sales were
  non-taxable (such as airline tickets, gambling,
  and interactive games). Of the remaining 37 of
  business-to-consumer sales, sales tax was paid on
  4 (4 of the 100 of business-to-consumer
  sales), and 20 was a substitute for other remote
  sales for which no tax was collected, leaving 13
  of total business-consumer sales untaxed. The
  study applied an average state and local sales
  tax rate of 6.5 to determine that the estimated
  sales tax loss was 170 million for 1998,
  representing one-tenth of 1 of total state and
  local sales tax collections.

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Interesting Studies Contd

• For the fourth quarter of 1999 alone, official
  government estimates show that the U.S. retail
  e-commerce sales amounted to 5.3 billion,
  account for a miniscule but growing share of the
  total retail sales estimated at 821.2 billion
  for the quarter.

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Why are digital purchases not taxable?

• Back in the day goods were physical, the
  production, distribution and consumption of these
  goods were easily taxable
• Difficult to determine the functions of digital
  products
• Taxing online sale of intangible is problematic
  because the location of customers cannot be known
  with certainty.
• Some purchases are intangible

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• Internet Purchases and Current Law

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• The 105th Congress passed the Internet Tax
  Freedom Act (ITFA) in 1998. The act established a
  three-year moratorium prohibiting state or local
  taxing authorities from imposing new taxes on
  internet access or imposing multiple or
  discriminatory taxes on electronic commerce.
• In November 2001, President Bush signed into law
  a measure to extend for two years the moratorium
  on multiple and discriminatory e-commerce taxes.
  The previous ban had expired in October 2001.
• In February 2003, several large retailers
  voluntarily decided to collect taxes on their
  online sales. Under a deal with 38 states and the
  District of Columbia, consumers will pay sales
  taxes based on the state in which they live.
  Currently, the retailers only collected taxes in
  states in which they have a physical presence.

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• Global Initiative for Addressing Tax-Related
  Issues in E-Commerce

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• The OECD has prescribed certain guidelines that
  they feel governments should adhere to while
  formulating new provisions regulating taxation of
  e-commerce transactions
• New technologies underlying electronic commerce
  should use to improve the taxpaying service.
• the principles that guide governments on
  conventional commerce should be adequately guide
  governments on relation to e-commerce those
  principles being neutrality efficiency
  certainty and simplicity effectiveness and
  fairness and flexibility
• those principles can be implemented for
  e-commerce through existing tax rules, albeit
  with some adaptation of the latter
• there should be no discriminatory tax treatment
  of e-commerce
• application of these principles should maintain
  fiscal sovereignty of countries, ensure a fair
  sharing of the tax base between countries, and
  avoid double and unintentional non-taxation
• The process of putting flesh on these principles
  should involve intensified co-operation and
  consultation with economies outside of the OECD
  area, with business and with non-business
  taxpayer groups.
• When required, government intervention should be
  proportionate, transparent, consistent, and
  predictable, as well as technologically neutral.

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• Would widespread taxation of Internet
  transactions threaten personal privacy?

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• In a word
• YES

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• The approaches involved in taxation require
  notice to the government concerning private
  purchase transactions in order to tax the
  recipient, citizens would be understandably
  concerned about privacy issues.
• While these methods may not unduly burden the
  out-of-state vendor under the Constitutions
  Commerce clause, they may cause an unacceptable
  intrusion into consumer privacy. In short,
  governments will likely have a difficult time
  justifying the taxing of e-commerce.

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• The Future of Internet Taxation

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• Problems achieving a uniform tax rates
• Purchasers and self-assessment of use tax
• Use of electronic trace to identify parties and
  transactions

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Websites of Interest

• www.mackinac.org/article.asp?ID2771
• www.law.wayne.edu/litman/classes/cyber/2000/swarto
  ut.html
• leahy.senate.gov/issuse/internet/CRSInternettaxati
  on04.pdf
• www.cbpp.org/512webtax.htm
• www.informationweek.com/story/showArticle.jhtm?art
  icleID18201906
• www.powerhomebiz.com/vol4/internet-taxation.htm
• www.taxprophet.com/faq/991114.htm
• www.icasit.org/ecommerce/taxation/rjones.html
• www.qlinks.net/quicklinks/taxation.htm

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• http//www.ecommercecommission.org
• http//www.cato.org/tech/taxandmonetarypolicy.html
  
• http//www.salestaxsimplification.org/documents/de
  fault.htm
• http//www.gigalaw.com/articles/taxes.html
• http//www.nga.org/nga/salestax/1,1169,,00.html
• http//www.ecommercetax.com/SalesAndUseTax.htm
• http//www.geocities.com/streamlined2000
• http//www.ryanco.com/gateway/electron.html
• http//www.cob.sjsu.edu/facstaff/NELLEN_A/ECOMM.pd
  f