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Taxation IssuesTaxation Issues
Annette Nellen,San José State UniversityIntroduction 413
Overview 413
Why E-commerce and the Internet Raise
Tax Issues 413
Why the Issues Need Resolution 414
Considerations in Addressing the Issues 416
Tax Issues Raised by E-commerce and the
Internet 417
Authority to Tax—Nexus and Permanent
Establishment 417
What to Tax—Tax Base and Characterization
of Income 418
Where to Tax—Sourcing 419Additional Tax Issues 420
Actions Taken to Resolve Internet and
E-commerce Tax Issues 421
Federal Advisory Commission on E-commerce 421
Streamlined Sales Tax Project (SSTP) 421
Taxation Reports of Various Countries and
the OECD 421
Looking Ahead 421
Glossary 422
Cross References 422
References 422
Further Reading 423INTRODUCTION
Overview
E-commerce is commerce, which has been taxed for
decades, so one might wonder why there is so much dis-
cussion today about taxing the Internet and e-commerce.
What is unique about e-commerce that has led Congress
to debate whether the Internet and online transactions
should be taxed, let alone how they should be taxed? Why
have there been international conferences and special task
forces set up by the Organization for Economic Coop-
eration and Development (OECD) to enable representa-
tives of many countries to study and discuss taxation of
e-commerce? Why are many of the U.S. states finally tak-
ing a serious and structured approach to working together
to simplify the U.S. sales tax systems due to the advent 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—interna-
tional, national, state, and local. Second, the borderless
and global nature of e-commerce will likely require more
global cooperation in identifying transactions and devel-
oping rational and consistent schemes for taxing some
e-commerce transactions. Thus, there is a need for dis-
cussions at the international level. Finally, many believe
that due to network effects there is a need to keep taxes
on Internet transactions low so that the number of users
grows and it becomes a better and more valuable network.
That is, the Internet is a more useful tool if there are moreand more people on it with whom you can communicate
and transact business.
This chapter explores the specific reasons why e-
commerce and the Internet raise tax issues, reviews tax
fundamentals and legal constraints that must be consid-
ered in resolving these issues, and explains the basics of
the key issues that exist at each level of government for
different types of taxes. In addition, significant develop-
ments in resolving the issues are explained.
The primary reasons why e-commerce and the Internet
raise tax issues are discussed next, along with the reasons
why the tax issues need resolution and what fundamental
tax and constitutional principles must be considered in
resolving them.Why E-commerce and the Internet Raise
Tax Issues
Location
Existing tax systems tend to determine tax consequences
based on the physical location of the taxpayer. The e-
commerce 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 invento-
ries so storage needs (and thus the need for many phys-
ical locations) are reduced. Online sales reduce the need
for firms to have sales offices scattered throughout a sales
region. Also, the model involves less vertical integration
and more outsourcing—again, resulting in fewer physical
locations necessary for a vendor to operate. Also, some
business assets, such as servers, are not necessarily tied413