Going Where No Taxman Has Gone Before: Preliminary Conclusions and Recommendations Drawn from a Decade of Debate on the International Taxation of E-Commerce

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I. INTRODUCTION

The advent of e-commerce has forever changed how business is done. Internet operations have launched even the smallest of undertakings into global markets and have made them part of an important industry with enormous potential. Such potential has led to enormous success: in 2008, despite the recession, online retail sales in the United States alone reached $133.6 billion, (1) up from overall sales of $22 billion in 1998. (2)

Governments throughout the world and relevant international organizations have recognized that if e-commerce remains beyond the purview of tax authorities, it will present a significant problem for public finances. (3) In the face of aging populations and their strain on national pension systems, lost tax revenue from e-commerce is not just another tax leak that budgets can afford. However, "the application of today's taxing regimes to the contemporary world of telecommunications and electronic commerce is uncertain, inconsistent, and complex." (4) The challenge for governments is to design a tax regime fit for this new cross-jurisdictional electronic environment.

The power to tax is one of the most fundamental prerogatives of every sovereign state. Raising tax revenue is a state's powerful instrument of macroeconomic management. Taxation affects legal, economic, social, political and fiscal conditions in any country. Therefore, it is not surprising that e-commerce was quick to appear on governments' tax radars. However, the world's governments have been guarded in their reactions to suggested changes in their tax systems, as well as in the existing system of international taxation. (5)

As more and more businesses and individuals rely on the Internet as their primary source of revenue, tax authorities around the world are seeking a uniform solution for taxing e-commerce. The Organization for Economic Co-operation and Development (OECD), the European Union (EU), and the U.S., Australian, and Canadian governments, among others, have issued reports identifying the critical tax issues raised by the advent of e-commerce. (6) Unfortunately, the current position of governments worldwide can best be characterized as "wait and see." (7) Despite a number of forums convened, commissions appointed and white papers issued, there remains little international accord, national legislation, or case law on the taxation of e-commerce. In the United States, Congress continues to ignore the Supreme Court's invitation in Quill v. North Dakota to legislate on the sales/use tax issue (8) and continues to extend the moratorium on new Internet access taxes, which was originally imposed in 1998. (9) The World Trade Organization (WTO) has also maintained its own moratorium on customs duties on e-commerce, (l0) introduced as early as 1998. (11)

Similarly, academia addressed various issues of taxing Internet business with great enthusiasm in the early days of e-commerce, but now seems to be losing interest in the issue. (12) Since governments and relevant international organizations are not taking action on Internet taxation, academics are writing less on the subject.

At the same time, "[w]hile talk about e-commerce tax issues has decreased in the past few years, the existence, and perhaps extent, of such issues has not decreased." (13) What is more, "[t]he Internet continues to grow, sales continue to increase, and consequently [one] must implement the solution now or risk repairing havoc later." (14) This is exactly why inquiries into the tax aspects of doing business online should continue.

This article reflects on the past decade of debate regarding the proper design of an international taxation regime that would fully reflect the new economic realities brought about by e-commerce. It starts with both challenging and confirming some presumptions about contemporary e-commerce taxation and then offers a set of guidelines for reforming the international taxation regime. …