International Trends: Sales, Use, and Consumption Taxation of E-Commerce

By Laguna, Francisco A. | Business Credit, October 2000 | Go to article overview

International Trends: Sales, Use, and Consumption Taxation of E-Commerce


Laguna, Francisco A., Business Credit


The increasing impact of the Internet and electronic commerce on the global economy is compelling governments to address the desirability of taxing electronic transactions on domestic and international levels. The overwhelming consensus between both governmental officials and industry leaders is that e-commerce should be subject to equitable, non-discriminatory tax regimes that will not binder its growth potential. This article contrasts the approaches and philosophies espoused by the United States and the European Union with regard to the imposition and collection of a sales/use or consumption tax on B2B and B2C e-transactions.

Governmental bodies, international organizations, and private sector groups commonly agree that e-commerce should be taxed in accordance with the standard principles governing taxation of ordinary commerce. The Organization for Economic Go-Operation and Development (OECD) emphasizes the following criteria:

* Neutrality. Taxation on e-commerce transactions should be neutral vis-a-vis commercial transactions conducted in a traditional manner; e-commerce should not be subject to additional discriminatory or non-equitable taxes.

* Efficiency. Business compliance and government administrative costs should be kept as low as possible.

* Certainty. Rules should be clear to allow taxpayers to determine their compliance obligations.

* Effectiveness and fairness. Collection efforts should result in the garnering of required and sufficient tax revenues, and attempts should be made to curb taxpayer fraud.

* Flexibility. Tax regimes should be flexible and evolving to provide for the technological advancements that may drive future commerce.

Applying the foregoing principles to differing degrees, the aforementioned jurisdictions and the OECD have attempted to address the issue of taxing Internet transactions and determining who will be responsible for collecting such taxes. The legal concepts of nexus and permanent establishment are central to these discussions.

United States

In the United States, the states legislate sales and use taxes and enforce laws related thereto. In some states, cities and localities may also impose sales tax. By some accounts, there are more than six thousand jurisdictions that may levy, to some extent, sales tax on commercial transactions. The lack of a federal sales tax or a uniform state sales tax creates an onerous burden on out-of-state vendors obliged to collect sales tax on remote sales.

The issue of whether a state can impose such obligation is not novel. To date, the question has revolved around out-of-state mail catalog vendors or vendors with no physical presence in the particular state. However, the advent of e-commerce, the increasing value of Internet sales, and the ability to reduce certain tangible goods--such as books or music--to digitized (or intangible) form have caused the federal and state governments to focus on alternative avenues for collecting sales and use taxes while allowing the Internet to continue its exponential growth.

At the outset, it is important to clarify that the federal Internet Tax Freedom Act (PL 105-277, 10/21/98) does not affect a state's ability to impose sales and use taxes on e-commerce. Rather, ITFA places a moratorium on state and local taxes on Internet access, unless such taxes were passed and enforced prior to October 1, 1998, and prevents the states from levying multiple or discriminatory taxes on e-commerce.

A state's ability to subject a remote vendor to its sales and use taxes regime is dependent on such vendor's nexus with the state. Nexus typically requires the vendor to have some link or relation with the state such that imposing tax collection obligations on the vendor is fair to the vendor and not prejudicial to interstate commerce. These determinations are subject to scrutiny under the Due Process Clause and the Commerce Clause of the US Constitution, respectively, by either state or federal courts. …

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