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Taxation Issues Involving E-Commerce. Shaun McGorry Executive Briefing July 2, 2009. Introduction. E-Commerce consists of the buying and selling of products or services over electronic systems such as the Internet and other computer networks.

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taxation issues involving e commerce

Taxation Issues Involving E-Commerce

Shaun McGorry

Executive Briefing

July 2, 2009

  • E-Commerceconsists of the buying and selling of products or services over electronic systems such as the Internet and other computer networks.
  • A sales tax is a consumption tax charged at the point of purchase for certain goods and services.
  • Until the late 1990s, the Internet was free of regulation by government in the United States at all levels (free of any specially targeted tax levies, duties, imposts, or license fees).
  • Mom-and-Pops shops: unreasonable burden to collect and pay dozens of different tax collection agencies.
1998 internet tax freedom act
1998 Internet Tax Freedom Act
  • Signed into law October 21, 1998
  • Bars federal, state, and local governments from taxing Internet access and from imposing discriminatory Internet-only taxes such as bit taxes, bandwidth taxes, and e-mail taxes
  • Bars multiple taxes on electronic commerce
  • Does not exempt sales made on the internet
  • They will be taxed at the same rate as non-Internet sales – similar to mail order sales.
collection issues
Collection Issues
  • Many complex issues
  • Recent Study: state and local governments will lose approximately $11.4 billion to $12.65 billion to uncollected Internet sales tax revenues per year by 2012
  • Six-year loss: between an astounding $52 and 56.3 billion
  • Many states: large budget deficits amid the continuing recession; looking for new sources of revenue
collection issues1
Collection Issues
  • Who should collect the taxes? State vs. Internet Service Provider
  • To what extent should retailers be required to perform collection duties?
  • How can this collection be accurately and meaningfully enforced by the taxing jurisdiction?
globalization issues
Globalization Issues
  • E-Commerce: ignores physical borders
  • New technologies and business methods (Internet, Intranet, etc.)may increase the opportunities for manipulation and tax avoidance
  • Easier for companies to avoid taxes by taking advantage of different tax rules and tax systems that do not operate well together

Pro E-Commerce Taxation

Anti E-Commerce Taxation

  • Rationale is essentially one of fairness
  • Storefront businesses are expected to collect local and state sales taxes
  • Giving online stores a tax-free pass effectively discounts everything they sell by 5 to 10 percent
  • Internet retailers enjoy a significant advantage over brick-and-mortar competitors
  • Also based on fairness
  • Small, locally owned web stores, would be forced to either spend large sums of money on customized software development, or to hire outside service providers to handle calculating, collecting, and disbursing sales taxes
  • This further increases their cost of doing business and tilts the scales even further in favor of large businesses
  • A national E-Commerce tax that would be levied on all E-Commerce transactions
  • Disbursed to states based on a variety of formulas
  • Not been welcomed warmly
  • Fear that a national E-Commerce tax will morph into a national sales tax on everything
  • Require delivery services to collect local taxes and to embed this cost in their delivery fees
  • Retailer would declare the type of goods and their value, and the courier would do the rest
  • Simply taxing the recipient based on the local taxes at the point of delivery
  • No perfect solution
  • Any taxation of the Internet and electronic commerce should be clear, consistent, neutral and non-discriminatory
  • Close cooperation and mutual assistance are necessary between the U.S. and its trading partners to ensure effective tax administration and combat illegal activities on the Internet.