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414 TAXATIONISSUESto a single physical location, but can easily be relocated
without any interruption to business operations. That is,
the location of the server is not relevant for business pur-
poses and thus, may not be a logical taxing point.
Location factors primarily raise tax issues at the in-
ternational, state, and local levels. For example, the U.S.
Supreme Court has ruled that a state may only require
a vendor to collect sales and use tax if the vendor has a
physical presence in the state (Quill, 1992). With fewer
physical locations, states will need to work either to have
the physical presence standard changed by Congress or
to get resident consumers to voluntarily remit the use tax
that is owed when a vendor was not required to collect
sales tax (the use tax is a complement to the sales tax in
all states with a sales tax). Collecting use tax from buyers is
difficult due to the greater number of taxpayers (relative to
collecting the tax from vendors) and difficulties of getting
consumers to understand the tax base. Also, outsourcing
of various services raises issues as to the nature of the
relationship between the company and the supplier in or-
der to determine whether the supplier is the company’s
agent, thereby creating a taxable presence (nexus) for the
company in the state.
Another potential issue tied to location is that the work-
force of an Internet-based company may be scattered
throughout a state or country. This can raise issues as
to whether the presence of the employee in a particular
state creates tax obligations for the employer in that state.
Also, cities may find that employers owe business license
taxes due to the presence of an employee in the city or if
the worker is not an employee, that the worker owes busi-
ness license taxes. Cities will likely have difficulty finding
these workers and businesses due to the number of peo-
ple involved and their lack of a storefront (many may be
working out of their home).Nature of Products
E-commerce allows some types of products, such as news-
papers and music CDs, to be delivered in digitized (intan-
gible) form, rather than tangible form. Digitized products
raise issues at the state level as to whether sales tax ap-
plies and in which state income is generated for state in-
come 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 oftangiblepersonal property approved, filled, and
shipped from outside the state. The nature of products
can also raise income tax issues regarding the type of rev-
enue 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 ex-
change Web sites where buyers post what they have to sell
and sellers match up with them, or vice versa. Such sitescan almost operate without human intervention for the
matching and payment functions. In addition, the Inter-
net has increased the use of bartering, most notably with
respect to exchange of Web banners that serve as adver-
tisements. These new techniques raise various tax issues.
For income tax purposes, issues include whether an ex-
change intermediary or broker should be accounting for
inventory, what amount of information reporting should
be required for low-value bartering transactions, and how
such transactions should be valued. At the international
level, the source of the income generated (which country)
might be uncertain. For example, should income gener-
ated from a product exchange Web site be attributed to
the country where the servers are located or where em-
ployees or customers are located or some combination of
these locations? At the state and local level, issues exist
as to when individuals have sold enough goods to be re-
quired to become sales tax collectors and how to enforce
such rules. Another issue raised by changes or elimination
of intermediaries is that some intermediaries collect ex-
cise tax, such as sellers of fishing equipment. When buyers
interact directly with a foreign manufacturer, rather than
a domestic retailer, the excise tax may go uncollected.
The Internet also allows for paperless transactions and
the potential for the use of electronic cash. This raises
administrative concerns for the Internal Revenue Ser-
vice and other tax agencies as to whether transactions
were properly reported, whether an audit trail exists, and
whether new reporting rules are needed. The concerns
of tax agencies include the reality that their technology
may not be as up-to-date as that used by taxpayers, digi-
tal transactions may be difficult to identify or track, and
the ease of operating from various locations may make it
easier for tax evasion to proliferate.Why the Issues Need Resolution
A report on e-commerce from the European Union (1997,
paragraphs 56, 58) 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 ex-
plained next along with some data to illustrate the under-
lying concerns.Legal Certainty
If businesses have uncertainties as to how e-commerce
and Internet transactions are taxed and in which jurisdic-
tion, 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 per-
haps modify existing tax rules and systems so they better
address Internet and e-commerce transactions.