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. …