Electronic Commerce: A Taxing Dilemma
Simon, Steven John, Informing Science: the International Journal of an Emerging Transdiscipline
The Internet is a vast multinational framework comprised of more than 150,000 individual networks and used by more than 304 million people around the globe. The Internet's commercial as well as individual consumer use has skyrocketed since 1995. During these last six years, the Internet has spurred the development of new businesses, products, services, and enabled unprecedented innovation as well as new and less expensive methods for research and communication. For individuals, the Internet provides access to a virtually limitless amount of unfiltered information, consumer choices, and communication. The Internet has also opened a new (cyber) world of business--electronic commerce--for both consumers and businesses. For purposes of this report, "e-commerce," as defined in the Internet Tax Freedom Act, includes "any transaction conducted over the Internet or through Internet access, comprising the sale, lease, license, offer, or delivery of property, goods, services, or information, whether or not for consideration, and includes the provision of Internet access." (Internet Tax Freedom Act 47 USC [section] 151 section 1004 (3), 1998).
One of the greatest potential impediments to the future of e-commerce is the debate and uncertainty over taxation. The U.S. General Accounting Office (GAO) estimates sales tax losses from remote sales to be as high as $20 billion in the year 2003, or about 8% of all sales tax collected. The report, titled Sales Taxes: Electronic Commerce Growth Presents Challenges; Revenue Losses are Uncertain (Government Accounting Office, 2000) examined all remote sales, including Internet-based and other forms of remote selling. While the estimates vary the impact on state and local governments, which raise revenue via sales and use taxes, is staggering. Currently in the United States there are approximately 7,500 governmental bodies (state, country, city) that levy some form of sales and use tax. Across these agencies there is no uniform method for determining the amount of tax levied and no standardized method for the registration, collection, and payment of the taxes. Additionally, there has been an extensive legal debate over what is taxable, how much tax is owed, and what determines the legal obligations of businesses to charge tax to their customers. These issues have led to many companies being excluded or ignoring sales and use tax. As e-commerce grows this potential source of lost income increases as the existing revenue base decreases (as a result of the shifting economy and sales diverted to on-line sellers). As a result, state and local governments are striving to insure a key source of revenue does not disappear.
This paper explores the issues and potential solutions surrounding the e-commerce tax dilemma. It provides a current assessment of the taxation environment for individuals and organizations impacted by the tax debate. Those individuals and organizations might include online business customers, remote sellers both traditional (mail order) and online, tax equity organizations, and governmental bodies. The paper is organized as follows. An examination of sales and use taxes opens the paper. Next, based on court cases, sales tax nexus (what determines if a company is responsible for charging tax) is discussed. The tax nexus discussion is extended to include global issues and the determination of what is taxable--an issue critical when considering digital downloads. A review of potential solutions to the e-commerce tax dilemma, within the current tax regime, is undertaken, followed by an examination of the value added tax scheme--a widely used procedure and potential replacement for the current system.
Sales Tax Basics
Sales taxes are "consumption-type" taxes designed to generate revenue. In general, these taxes are calculated and collected by businesses at the point of sale and remitted to the appropriate taxing authorities. Sales taxes have been levied throughout history, and became more widely applied in the United States beginning with the Great Depression. States' authority to levy these taxes is derived from the 10th Amendment of the United States Constitution which states, "The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people." Today, there are over 7,500 state and local governments levying sales taxes out of a potential 30,000 jurisdictions (Lilley and DeFranco, 1999). Local sales taxes are currently authorized in 33 states. Ordinarily imposed on the sale of tangible goods, the rates for these taxes range from 0.875% to 11% (Lilley and DeFranco, 1999). A small number of state and local governments also impose sales tax on some services, such as personal and repair services. Besides determining their own rates, states and, in some cases local governments define, classify, and exempt certain items within their tax codes. Many of these exemptions target necessities, such as food and prescription medicines. Throughout the year tax rates, definitions, classifications, and exemptions included in the sales tax code may be changed. State and local governments that levy sales taxes rely on them as a major source of revenue for their general funds. According to the United States Census Bureau, state and local governments collected approximately a total of $237 billion in sales and use taxes in 1999, comprising 24.8% of all revenues generated in that year (US Department of Commerce, 1999).
Sales tax is a tax on gross receipts from retail sales of products and services and is calculated as a percentage of the sales price. The sales tax regime is actually made up of two separate taxes, sales tax and use tax. The two taxes are intended to work in tandem to insure that tax is paid on ALL taxable retail sales. Sales and use taxes are usually applied using exactly the same tax rules and tax rates. The intent of the sales/use tax regime is for any taxable sales that fall through the sales tax net to be picked up and taxed under the use tax rules. However, the current tax regime falls far short of this goal.
Use tax is a tax on the use or consumption of a taxable product or service. It generally applies to the same kinds of taxable receipts as the sales tax. Use tax is meant to apply only if a sale has not been subjected to sales tax. This usually occurs only when the sales tax does not apply because the seller is outside the buyer's state. Use tax usually applies if the product or service is purchased remotely and used or consumed in the buyer's state. The seller must collect the use tax if it has nexus in the state. Use taxes are most commonly due when an item is purchased from a business in another state and the business does not have sufficient presence (nexus) in the consumer's state for the sale to be subjected to sales tax. In the event that a consumer purchases an item and the sales tax is not collected, the consumer is required to remit the use tax according to the location of consumption of the item. However, the rate of remittance of the use tax is low for business-to-consumer sales. One reason for these low collection rates is that taxing agencies have no practical means of identifying individual purchases or their consumers, making enforcement difficult and in many cases not cost effective. Most use tax remittances come from business-to-business sales where businesses are registered within the states and subject to audits. There is no conclusive data to indicate what the collection rates of the use tax would be on business-to-consumer sales if jurisdictions increased enforcement and public education of use tax obligations.
Sales tax is imposed on gross receipts from the sale or lease of tangible personal property (TPI), unless the property is specifically exempted from tax. That is, all TPI is taxable, unless an exemption has been provided. Services, on the other hand, are not taxable in most states unless made taxable on a service-by-service basis. For instance, a state may provide that services are generally not taxable, but that computer services or professional services are taxable. Sales tax ordinarily arises when a seller and buyer are in the same state. In most states, sales tax is imposed on customers but collected by sellers, though in some states, tax is imposed directly on sellers. Whether the tax is technically imposed on the buyer or seller usually has no practical effect on the way a sale is taxed.
The sales tax issue involves not only questions about states in which sellers must collect tax--it involves determinations of what is taxable. Under the rules of all states that impose a sales tax, most tangible personal property is taxable, but only selected services are taxable. We know that products delivered in boxes are tangible personal property, but what about products delivered electronically, such as software, books, or music? States have not issued complete rules on whether electronically delivered products (digital products) are tangible personal property, and therefore taxable. The rules that have been issued are wildly inconsistent from state to state. Sales tax is usually collected only on sales of tangible personal property (TPI). Usually, all sales of TPI are taxable, unless a state's tax code provides a specific exemption. One such exemption is for food, which is typically not subject to sales tax. Some TPI is exempt from tax at certain times of the year. For instance, a state may exempt clothing from tax during the "back-to-school" buying season. In other cases TPI is exempt based on price. For example, an article of clothing might be exempt if it is priced at less than $100. The definition of TPI has become somewhat unsettled with the introduction of new electronically delivered products. When a product can be delivered either through the mail or electronically, its classification as TPI when delivered electronically is unsettled.
Services are usually not subject to sales tax unless a state's tax code specifically provides for taxation. Some states are like California and tax only a handful of services. The states of Hawaii and New Mexico, on the other hand, tax a long list of services. With the Internet new services have arisen, some of which are taxable in some states. These include, in some states, Internet access services, online access to entertainment, research services, online advertising services, and online professional services. The Internet Tax Freedom Act (ITFA) prohibits taxation of some online services.
The key to sales (and use) tax is the location of the sale. There is some …
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Publication information: Article title: Electronic Commerce: A Taxing Dilemma. Contributors: Simon, Steven John - Author. Journal title: Informing Science: the International Journal of an Emerging Transdiscipline. Volume: 5. Issue: 1 Publication date: Annual 2002. Page number: 29+. © 2008 Informing Science Institute. COPYRIGHT 2002 Gale Group.
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