Internet Taxation

 
Internet Taxation
Internet taxation is a controversial and complex issue. While one side argues for a permanent
ban on Internet taxation, the other maintains the necessity of taxing Internet sales. The
geographic locations of the vendors, consumers, ISPs, servers and other participating parties
present major issues. If both a vendor and a consumer are located in the same state, a
sales tax can be imposed. If the vendor and the consumer are not located in the same state,
then the sale is subject to a use tax. The state in which the purchased property or service is
used directly imposes this tax on the consumer. If the vendor has a physical presence, or
nexus, in that state, then it is required to collect the tax; otherwise, the vendor must assess
the tax and pay it directly to the state. This was determined by the 1992 Supreme Court
case, Quill Corp. vs. North Dakota to address catalog/mail-order sales. This assessment is
a voluntary responsibility, and although compliance often occurs in business-to-business
transactions, it is far less common in business-to-consumer sales.
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There are other problems with interstate taxation. Physical presence is proving to be a
difficult term to define. The location of the ISP, the location of the business or the location
of the server that hosts the home page are all reasonable ways to identify a business’ physical
presence. In addition, taxation policies vary by state. What is considered a taxable item
in one state may be considered a necessity, and consequently nontaxable, in another.
Many state and local governments support remote taxation of consumers based on the
location of the vendor’s physical presence. In some cases, sales tax revenues are the single
largest source of a state’s revenue and are used to fund government-subsidized programs,
including fire departments, police departments and public-education systems. The lack of
Internet sales tax also allows the nation’s wealthiest members (those who can afford
Internet access) to shop tax free, while those without Internet access must continue to pay
sales tax. This is commonly referred to as the digital divide (see Section 7.10, Socio-Economic
Segregation). Figures suggest that the amount of uncollected sales taxes from online
Fig. 7.1 FTC “dummy” site for NordiCaLite. (Courtesy of the Federal Trade
Commission.)
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shopping was $525 million in 1999. [***“States Lose Millions of Tax Dollars to
Internet,” Computer World 6 March 2000: 62.***] State and local governments argue
that removing taxation methods from their jurisdiction infringes upon state sovereignty, an
element of the checks-and-balances system maintained by the U. S. Constitution.
[***<www.llrx.com/congress/072297.htm>***].
Fig. 7.2 FTC warning page. (Courtesy of the Federal Trade Commission.)
Opponents to Internet taxation claim that it will inhibit the growth of the Internet.
There are an estimated 7,500 different taxation methods in the United States. [***D.
Brown, “Will E-Commerce Stay a Tax Free Haven?” Inter@ctive Week 27 March
2000: 14.***] To meet the taxation requirements of all parties in online transactions, ebusinesses
would be required to understand and implement all these methods. Opponents
to Internet taxation suggest that the real revenue for state and local governments will come
as a result of the high-paying technical positions created by Internet growth. The higher salaries
require higher income taxes and this money is used to boost local economies. Opponents
further argue that brick-and-mortar businesses will continue to survive, despite the
growth of online purchasing, because brick-and mortar purchases provide instant gratifica-
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tion, and the sales personnel of brick-and-mortar businesses offer human-to-human interaction.
The Internet Tax Commission, created by the Internet Tax Freedom Act, was developed
to review the issue of Internet taxation and return a recommendation to Congress in
April, 2000. [***D. Brown, “Gilmore’s Commission Issues E-Tax Report,”
Inter@ctive Week 17 April 2000: 20.***] Issues to be addressed by the commission
included a revision of state and local taxes to make taxation a feasible process for Internet
businesses, clearer definitions of the meaning of “physical presence” and universal taxation
exemptions.
The panel included members of federal, state and local government, industry leaders
and officials of trade organizations. Despite the lack of unanimity, the commission agreed
on several recommendations, including an extension to the moratorium on Internet taxation
and international e-commerce taxation, and the elimination of taxes on digital content (e.g.
music and software). The commission further recommended that a clear definition of
“physical presence” be determined and taxation methods be simplified by each state. The
panel also recommended welfare money be used to provide Internet access to all demographic
groups. Consumer privacy and Internet access for the poor were also among the
issues presented by the Commission to Congress. [***D. Brown, 20.***]
The Streamlined Sales Tax Project is yet another panel designed to resolve Internet
taxation issues. The panel suggests that taxation should occur in the state where a product
is delivered and that the state should determine the percentage taxed. Similarly, the
National Academy of Science’s National Research Center suggests a flat tax rate should be
collected by the vendor and returned to the state in which the vendor resides. [***D. Callaghan,
“The States Want a Fair Share,” eWeek 16 October 2000: 49.***]
Taxation problems with regard to the Internet are as abundant internationally as they
are in the United States. For example, businesses owned and located outside the U.S. can
sell to U.S. citizens and not be required to collect sales tax on the transaction. However,
taxation becomes more complex if the business is located outside the U.S., but the Web site
is hosted in the U.S. Taxation regulation in this case has yet to be determined. These situation
exist among most nations, each supporting its own taxation mechanisms.
[***<www.ecommercetax.com/faq.htm#International Taxation of
Ecommerce>***] For example, each country in the European Union imposes a valueadded
tax (VAT) ranging from 15–25 percent on goods sold to consumers within the European
Union. Under the current system, when a non-E.U. business sells to an E.U. business,
the buyer (the E.U member) is required to self-assess the VAT. However, when a non-E.U.
business sells online to an individual consumer in the European Union, the VAT is not paid
to the E.U. This gives non-E.U. businesses an advantage, as their products (no VAT is
assessed) are ultimately less expensive for the consumer.[***<www.ecommercetax.
com and www.eurovat.com>***]
In addition to taxation, the global capabilities of the Internet and wireless technologies
raise many additional issues. These are discussed in Chapter 9, International Wireless
Communications.
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