The debate over internet longstanding tax issues, such as collection of use tax on mail order sales, sourcing of income, and characterization of revenues from software transactions, started several years ago, when Internet was at its earliest stages as e-commerce growth started to produce sales tax numbers that were simply too large to ignore. For example, as of 2003, electronic commerce in the US generated sales was worth US$ 12.2 billion. It is a debate where most economists and tax practitioners argue that taxation makes economic and business sense, while some politicians with an anti-tax platform have adopted e-commerce as a focal point for their arguments.
The fate of internet taxation depends - whether to prevent extensive taxation or impose the full gamut of taxes. However, even among those who argue that ecommerce is commerce and should be taxed, the ideas for how to effectively tax it are diverse.
Because the World Wide Web is, as its name implies, worldwide, businesses that sell online can potentially reach billions of customers in every country of the world. Even small companies with websites are attracting a client base never before possible. Many are discovering just how international the Internet really is, processing orders not only from the next town or state, but from the next continent, too. The main problem appears when persons try to avoid paying income taxes by simply renting space on a computer in an offshore island tax haven such as Nevis or Bermuda and then operating that remote computer over the Internet from an office or home in the US.
There are several points to consider in examining how various tax rules should (or should not) apply to e-commerce. E-commerce represents a new business model. As such, it creates some challenges to tax systems that were designed with a different model in mind.
The first issue is location. Existing tax systems tend to determine tax consequences based on where the taxpayer is physically located. However, the e-commerce model enables businesses to operate with very few physical locations. Also, some business assets, such as servers, are not necessarily tied to a single physical location, but can easily be relocated without any interruption to business operations.
The next factor is the nature of the products, which raise income tax issues regarding the type of revenue generated and how it is to be reported, as well as whether digitized products are subject to traditional inventory accounting rules.
Also, the nature of transactions which allows for paperless transactions and the potential for the use of electronic cash raises administrative concerns as to whether transactions are properly reported, whether an audit trail exists, and whether new reporting rules are needed.
Policy makers want to stop the loss of tax revenue from the internet for their treasuries and are pushing for a variety of changes to the current tax codes as the main claim is that tax free e-commerce really amounts to mass tax evasion.
Another important argument put forward by pro-tax supporters is the alleged unfair advantages internet has over traditional retailers.
The anti tax camp argues that the internet, by its very nature cannot be regulated or controlled. Businesses and policymakers opposed to internet taxes argue that the internet should remain a "global free trade zone".
Another important contention is the fact that the internet is inherently non-geographic. This makes every internet transmission vulnerable to multiple taxation that could stop economic growth. Taxing the internet may also drive the dot.coms to locations that do not tax them if we impose taxes that reduce their businesses.
New international guidelines are helping to answer those and other questions. Working together as members of the Organization for Economic Cooperation and Development, many countries have signed on to new guidelines with the goal to build consumer confidence in the global electronic marketplace and to ensure that consumers are just as safe when shopping online as when shopping offline-no matter where they live or where the company they do business with is based. It must be emphasized that there are very few new e-commerce tax rules and principles. Rather, existing tax rules are presently applied, largely by default.
By Ronen Taieb
