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TAXISSUESRAISED BYE-COMMERCE AND THEINTERNET 417gives Congress the power to regulate commerce among
the states. In determining whether the due process clause
is violated, courts will look at the effect of the suspect tax
rule on the particular taxpayer involved. In contrast, to
determine whether the Commerce Clause is violated, the
courts will look at the effect of the particular tax rule on
the national economy—does it impede commerce among
the states, such as where a state is taxing activity that oc-
curs outside of its borders?
A state or local tax that creates a substantial risk of
international multiple taxation or preventing the federal
government from speaking with one voice in the regu-
lation of commercial relations with foreign governments
may violate the Commerce Clause (discussed later), Ex-
port Clause (no tax or duty may be imposed on articles
exported from any state), and/or Supremacy Clause (fed-
eral law is the supreme law of the land).Global Business Environment
Because the e-commerce business model is a global one
for businesses of all sizes, any country or state looking at
resolving e-commerce taxation issues should be cognizant
of what similar proposals and actions are being consid-
ered by other countries and at the international level, such
as by the OECD. In the e-commerce taxation studies that
several countries engaged in during the late 1990s, it was
recognized that countries will need to work together to
deal with tax issues so as to avoid multiple taxation and
undue competition, as well as to update and coordinate
treaty provisions, enforcement efforts, and the legal basis
for taxing multinational transactions.
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. Second, digitized prod-
ucts should not be treated as a supply of goods (but as a
service for consumption tax purposes).TAX ISSUES RAISED BY E-COMMERCE
AND THE INTERNET
The general reasons why the Internet and e-commerce
raise tax issues, such as location and digitized products,
were explained earlier. This section covers the tax rules
that raise issues. The issues are grouped together by the
nature of the issue along with the specifics of the issues at
the international, national, and/or subnational levels. The
subsequent section explains some of the activities under-
way to resolve these issues.Authority to Tax—Nexus and
Permanent Establishment
In any tax system, it is important to know which ju-
risdiction has authority to impose a tax on a busi-
ness or individual. The federal government and most
states have provided some guidance with respect to both
sales and income taxes. The terminology commonly used
is nexus, which involves knowing in which state it would
be fair to impose tax collection or payment obligationson a taxpayer. At the international level, countries use the
concept of permanent establishment to determine when a
business should be taxed within a particular jurisdiction
because the taxpayer has a place of business there.Nexus
For sales and use tax purposes, the U.S. Supreme Court
has held that a business must have a physical presence
in a state before the state may impose sales tax collec-
tion requirements on a vendor. The ruling (Quill, 1992),
involved Quill Corporation. Quill sold office products to
customers in North Dakota and did not have a sales of-
fice, warehouse, or personnel in North Dakota. Quill con-
ducted business by sending product catalogs to compa-
nies in the state. In determining whether it was permis-
sible for North Dakota to collect sales tax from Quill, the
Court noted that for due process purposes, it would be
more appropriate to not focus on physical presence, but
to instead look at whether the company’s contacts with
the state make it reasonable for the state to require the
company to collect use tax. InQuill, the Court stated that
if an out-of-state business purposefully avails itself of the
benefits of an economic market in the state, it need not
have a physical presence in the state to be subject to tax
collection requirements in the state.
With respect to the Commerce Clause, the Court stated
that North Dakota’s enforcement of the tax against Quill
was an unconstitutional burden on interstate commerce.
However, the Court pointed out that because the Con-
stitution gives Congress the right to regulate interstate
commerce, Congress could provide a mechanism to allow
states to collect sales and use tax from an interstate mail-
order business that was not physically present in the state,
without violating the Commerce Clause.
Issues still exist after theQuilldecision because it is not
clear how much physical presence is needed to enable a
state to impose sales tax collection responsibilities on ven-
dors. Quill actually had some diskettes in the state, but
the Court did not view that as sufficient physical presence
to allow the state to collect tax from Quill. Issues include
whether software is considered a physical presence (some
states have taken the position that it is tangible), whether
leased phone lines and servers create nexus, and how of-
ten employees must be in a state before the employer is
considered to have nexus.
With respect to state income tax, Public Law 86-272
(discussed earlier) provides guidance on when a state may
impose income taxes on a business with customers within
the state. Because this rule only applies to sales of tangi-
ble property though, it is out-of-date today because the
transfer of services and intangible items is a significant
business activity. Where a transaction does not fall under
the protection of this public law, the general guidance on
nexus is to be applied.Permanent Establishment
In 2000, the OECD addressed the concept of permanent
establishment (PE) in an e-commerce environment by
drafting additional commentary to become part of its
model tax treaty (OECD, 2000). Tax treaties between coun-
tries serve to identify whether the resident or source coun-
try has the right to tax income of a multinational business
in order to avoid double taxation. Most tax treaties today