E-commerce is commerce, which has been taxed for decades, so one might wonder why there is so much discussion today about taxing the Internet and e-commerce. Why have there been international conferences and special task forces set up by the Organization for Economic Cooperation and Development (OECD) to enable representatives of many countries to study and discuss the taxation of e-commerce?
There are a few answers to these questions. First, in many respects, e-commerce is a new business model, and existing tax systems were not created with certain aspects of that model in mind. Thus, many existing tax rules and structures do not clearly address e-commerce and Internet transactions. The issues raised exist at all levels—international, national, state, and local. Second, the borderless and global nature of e-commerce will likely require more global cooperation in identifying transactions and developing rational and consistent schemes for taxing some e-commerce transactions.
Why E-commerce and the Internet Raise Tax Issues
Existing tax systems tend to determine tax consequences based on the physical location of the taxpayer. The eCommerce model enables businesses to operate with very few physical locations, and thus, fewer taxing points. An online vendor can easily sell to customers throughout the world from a single physical location. The e-commerce business model also involves more customized inventories so storage needs (and thus the need for many physical locations) are reduced. Online sales reduce the need for firms to have sales offices scattered throughout a sales region.
Nature of Products
E-commerce allows some types of products, such as newspapers and music CDs, to be delivered in digitized form, rather than tangible form. Digitized products raise issues at the state level as to whether sales tax applies and in which state income is generated for state income tax purposes.
Public Law 86-272, enacted in 1959, prohibits a state from taxing a foreign corporation’s net income derived from activities within the state if those activities consist merely of solicitation of orders for the sale of tangible personal property approved, filled, and shipped from outside the state.
The nature of products can also raise income tax issues regarding the type of revenue generated and how it is to be reported (sale of goods, sale of intangibles, or services), as well as how digitized products are reported under the tax accounting rules for inventory
Nature of Transactions
The Internet has facilitated innovation in the sale and purchase of goods and services. For example, individuals can offer items to a worldwide group of potential buyers via auction sites, such as eBay. The Internet can also be used to easily link business buyers and sellers through exchange Web sites where buyers post what they have to sell and sellers match up with them, or vice versa.
Why the Issues Need Resolution
A report on e-commerce from the European Union posited that to enable e-commerce to develop, tax systems needed to provide legal certainty, tax neutrality, and safeguards for government revenues. These three factors have also been identified by the U.S. and other countries as key e-commerce taxation concerns.
These three factors or goals help to identify the nature of the work that needs to be done to provide e-commerce businesses, consumers, and governments the certainty needed to operate effectively and have confidence in the e-commerce business model. These three factors are explained next along with some data to illustrate the underlying concerns.
If businesses have uncertainties as to how e-commerce and Internet transactions are taxed and in which jurisdiction, the highest use of e-commerce as a business model will not be achieved. Also, if consumers are unsure as to whether something is subject to sales tax or if they should self-assess a use tax, they may be reluctant to buy goods and services online. Thus, there is a need to clarify and perhaps modify existing tax rules and systems so they better address Internet and e-commerce transactions.
A final reason why e-commerce taxation issues require resolution is that there is a potential for revenue loss at each level of government. For example, because the e-commerce business model enables businesses to operate with few physical locations, yet reach customers throughout the world, states will find that there are more no present vendors not required to collect sales tax. Although consumers purchasing taxable items from no present vendors should self-assess use tax and remit it to the state, use tax compliance and enforcement is very low and it is difficult to collect the tax from consumers. naasongs
An OECD report (1998) noted that broad taxation principles should apply to e-commerce. With respect to consumption taxes, two of the conclusions reached are relevant not only to the U.S. Government but also to state and local governments. First, the OECD concluded that consumption taxes should be based on the location where consumption takes place.