taxing cyberspace : economic application and cross-country policy analysis

8/18/2019 Taxing Cyberspace : Economic Application and Cross-Country Policy Analysis

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TAXIN G CYBERSPACE : ECO N O M IC A PPLICATIO N AN D

CR O SS-CO U N TRY PO LICY AN ALYSIS

BY: FAR U Q SYED H ASA N

An Honours essay submitted to Carleton Universityin fulfillment of the requirements for the courseECON 4908 as credit to!ards the de"ree of #achelor

of Arts !ith Honours in Economics and $a!%

D epartm ent ! E"nm #"$Car%etn U n#&er$#t'

O tta( a) O ntar#

Apr#% *t+) ,.

- 1 -



TAB LE O F CO N TEN TSTAB LE O F CO N TEN TS////////////////////////////////////////,0 1 IN TRO D U CTIO N///////////////////////////////////////2

, - CO M M O D ITY TAX TH EO RY//////////////////////////////3

,/0 - H ( Ta4#n5 E! !e"t$ M ar6et$/////////////////////////3,/, 1 Pr#n"#p%e$ ! Ta4at#n/////////////////////////////3

,/,/0 E! !#"#en"'////////////////////////////////////////// 0 ,/,/, E78#t'////////////////////////////////////////////// 02 ,/,/2 S#m p%#"#t'////////////////////////////////////////// 09 ,/,/ N e8tra%#t'////////////////////////////////////////// 0;

//////////////////////////////03,/2 1 CO N SU M PTIO N TAXATIO N /////////////////////////////////////// 03,/2/0 1 Term #n%5'

//////,,/ 1 N ATIO N AL SALES TAX <S/ <ALU E AD D ED TAX =<AT> ////////////////////////////////////////////////,,//0 1 <AT ///////////////////////////,,//, 1 N ATIO N AL SA LES TAX =N ST>

////////////////////////////////////////,0,//2 1 N ST < S/ <AT 2 1 TAX AN D E-CO M M ERCE///////////////////////////////,2/0 1 E-"m m er"e <$/ Br#"6-An?-M rtar//////////////////,2/, 1 @ +at U n#78e Ta4at#n I$$8e$ A r#$e////////////////,;2/2 1 M a#% O r?er H #$tr'///////////////////////////////222/2/0 S#%a$ M a$n C/ &/ @ a$+#n5tn State Ta4 Cm m #$$#n/// 22 2/2/, N at#na% Be%%a$ H e$$) In"/ &$/ D epartm ent ! Re&en8eState D epartm ent ! I%%#n#$ ////////////////////////////// 2 2/2/2 Q 8#%% Crp/ &/ N rt+ D a6ta 033,////////////////// 29

2/ 1 Pr an? Ant#-E-"m m er"e Ta4 Ar58m ent$////////////2*

1 Attem pt$ at P%#"' ///////////////////////////////2/0 1 O ECD /////////////////////////////////////////////2/, 1 O t+er E! !rt$////////////////////////////////////;

. 1 Ca$e St8?#e$ //////////////////////////////////////*./0 1 EU ///////////////////////////////////////////////*./, 1 IN D IA////////////////////////////////////////////.2./2 1 Un#te? State$////////////////////////////////////.3./ 1 A8$tra%#a////////////////////////////////////////9;

9 1 Cn"%8$#n /////////////////////////////////////////;

; 1 B#%#5rap+' //////////////////////////////////////;2

* 1 APPEN D IX///////////////////////////////////////////;3

- 2 -



0 1 IN TRO D U CTIO N

&he internet connects 'eo'le from around the !orld !ithin

instances to one another diminishes borders and allo!s

for transfer of data at s'eeds that are "ettin" fasterevery year% (ue to its !ides'read reach ease of access

and universality of a''eal many firms have o'ted to )set

u' cam'* on the internet and sell "oods and services

online% &his ty'e of activity has been anointed the name E+

business and the value of these "oods and services is E+

commerce ,short for Electronic Commerce-.% /n this

valuation only 'riced items are included ,information

available for free is ecluded-%

Even thou"h E+commerce has eisted for over thirty years

it has maintained e'onential "ro!th over the last .0 years

alone and there are 'resently an estimated 190 million

'eo'le on the internet in 2004 !orld!ide as com'ared to 34

illion in the year .9952 ,6ee &able 2 in A''endi-%

E+commerce in the United 6tates currently re'resents about

3 'ercent of total retail sales !hich is e'ected to

increase to 8 'ercent by 2008% Of the 71%5 million U%6%

households online this year orrester re'orted that 5.

'ercent sho''ed online%3

E+commerce 'resently re'resents . to 2 of total retail

sales in the EU: total business+to+consumer E+commerce !as

e'ected to increase from ;.0 billion to ;10 billion in

1 esenbour" &homas $% <easurin" Electronic #usiness= >a"e 4% U%6#ureau of Census Au"ust 200. 2 Ca'tain >hili''e <?no!led"e ana"ement Overvie!= @HO November 200. 3 (ne!s%com E+commerce ta bill #efore house 6e'tember 2003 +htt'B!!!%nacsonline%comNAC6Dovernment@ashin"tone'ortArchivesnd0929032%htm

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2003% An estimated 54 of Euro'ean /nternet users !ill sho'

online in 2007%4 esearch sho!s that .5 of the total

'o'ulations in the accession countries !ere usin" the

/nternet by the end of 2003%5

&he U%6% (e'artment of Commerce estimated an overall of

F.077 #illion value of e+business activity in the year

200. G6ee &able . in A''endi% rom the table !e can see

that overall #usiness to Consumer ,#2C- transactions are

lar"er than #usiness to #usiness ,#2#- transactions%

Ho!ever E+commerce #2C are less than .0 of E+commerce #2#

transactions and this sho!s the "reater reliance and

!illin"ness of business to embrace this technolo"y%

&here have been many re'orts that have "rossly over

estimated the losses of ta revenue due to the use of E+

commerce and this has led to much concern !orld!ide% &he

U%6% (e'artment of Commerce estimates re'orted totals of

#2# and #2C sales combined for the years 2000 and 200. as

F14%. #illion and F88%7 #illion res'ectively%7 &hat is a 20

increase in a one year s'an% uture estimates of the value

of E+commerce sales only hi"hli"ht further the im'ortance

of creatin" effective ta 'olicy% &his in 'art !ould be due

to the different accounts of !hat E+commerce com'rises and

also inflated 'roIections of e'ected E+commerce activity%

Althou"h the taation of ,inter-nationally traded "oods is

not somethin" ne! for le"islators the lacJ of definition

and "uidelines about taation has inhibited further

4 Euro'ean Commission 6tudy on (irective 2. November 20035 Aqute esearch ay 2003%

6 Kohnson >eter A% <A Current Calculation of Uncollected 6ales &aesisin" from /nternet Dro!th= >a"e 5 (irect arJetin" Association arch 2003

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le"islation% /t can be ar"ued that the issue of E+commerce

taation requires a miture of 'olitical and economic

rationales for le"islation the effects of !hich may decide

for today and tomorro! ho! E+commerce is conducted

!orld!ide%

&able . GA''endi sho!s the 'ercenta"es of the 'o'ulation

in the res'ective countries that are usin" the internet

and the 'ercenta"e of the 'o'ulation that is actually

maJin" online 'urchases as !ell% @ith ece'tion of /taly

and rance most Euro'ean countries in the database ,such

as the Netherlands (enmarJ and inland- all have very

hi"h internet usa"e rates% A''roimately 20 of the

'o'ulation in each of those countries carries out 'urchases

online% Also note that even thou"h Canada*s 'ercenta"e of

internet users is hi"her than that of the United 6tates

the 'ercenta"e of online consumers in the U%6% is about 1

hi"her than that in Canada% &his could be in 'art because

Canadians have the re'utation to be more risJ averse

o''osed to Americans1 or that there are not enou"h dot-

com ’s tar"etin" the Canadian marJet% Another reason could

'ossibly be the differences in the avera"e a"e of internet

users in the res'ective countries: children may constitute

a lar"er 'ercenta"e of the users in Canada as o''osed to

the U%6% #ear in mind that these statistics are

re'resentative of a 'ercenta"e only and not re'resentative

of the volume of e'enditure ,consum'tion-%8

7 orin %A% and 6uareL % MisJ Aversion evisitedM Kournal ofinance6e'tember .20.+.2.7 .9838 &he 'o'ulation of 6!eden is estimated at 9 million ,2004- ,C/A @orldact#ooJ @ebsite- Canada 32%5 illion (enmarJ and inland 5%4illion each U6A 293 illion U? 70 illion Australia .9 illion/taly 58 illion rance 70 illion and eico at .04%5 illion% 6o

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E+commerce also includes the sale and 'urchase of di"itiLed

"oods ,such as e+booJs e+re'orts- and for services to be

'rovided online% @e shall not be looJin" at either of these

issues% /n this 'a'er / !ill s'ecifically focus on taation

'olicies ado'ted by different countries to!ards the sale of

physical"oods 'urchased over the internet the relevant

economic 'rinci'les that a''ly to this situation and some

of the issues and conflicts of o'inion that surround

internet ta 'olicy%

(ue to the softnature of electronic commerce some uniqueissues arise in formin" ta 'olicy for it that do not eist

in traditional commerce% A select fe! of these issues

include findin" !here Iurisdiction lies in a cross+border

transaction !here Iurisdiction lies !hen there may be

multi'le servers9 involved in 'rocessin" a sin"le

transaction !hen the actual transaction is concluded G!hen

the user clicJs or !hen the "ood is delivered% &here is

also the issue of use taes to be discussed further later

on%

/n order for a firm to be liable for income ta it has to

be 'roven that it has a >ermanent Establishment or >E in

that Iurisdiction% One of the more central questions in E+

commerce !ould be !hether a server can constitute as a >E

or not% /n order for a firm to be liable to remit sales

taes the same 'roof of >E has to be 'rovided% &his

'ermanent establishment is "iven the technical name Nexus%

althou"h there is dee' s'read in the 'o'ulations this is notre'resentative of 'urchasin" activity volume%9 6ervers refers to online com'uters that host an a''lication or !ebsite%

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Kohnson ,2003- ar"ues that an earlier study conducted at

the University of &ennessee "rossly over estimates the

losses in collectable taes% He ar"ues that because of a

faulty understandin" of the dynamics of E+commerce the

!idely held notion that these losses are lar"e and "ro!in"

is incorrect% He further ar"ues that since the maIority of

E+commerce activity is re'resented by #2# transactions and

states currently hold the authority to request an audit of

a firm that is believed to be evadin" taes the 'ro'osed

notion that a detailed definition of neus is not enou"h to

remedy the ta losses% /n other !ords he ar"ues that even

if a detailed definition of neus !as established and

follo!ed by all the nations in the !orld the 'roblem is

much bi""er than Iust the notion of neus% &he need for a

consistent frame!orJ is 'aramount because states have the

choice to formulate ta 'olicy as they see fittin" their

o!n needs% &his may ultimately lead to too many differin"

re"ulations that merchants !ould have to constantly be made

a!are of%

&he 'ur'ose of this study is to find reasons for the

discre'ancies bet!een !hat is considered the o'timal 'olicy

solution in economic theory and the actual 'olicies

im'lemented% After a thorou"h eamination of the

information "athered it !as found that des'ite maIor

attem'ts at international solidarity fe! nations have

succeeded in creatin" collaborative efforts% ost have

decided to maJe decisions in their best interest or

im'lement 'olicy that is in line !ith their already

eistin" 'olicy% /n reality there still remains much !orJ

to be done !ith re"ard to the 'rinci'les that "overn

internet taation and in the harmoniLation of ta 'olicy%

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&raditional retailers that have the resources to do so are

movin" from )bricJ+and+mortar* com'anies and transformin"

into )bricJ+and+clicJ* enter'rises%.0 6o it !ould a''ear

that the internet is here to stay% /n any case the subIect

is !orthy of study% @e can not avoid these issues%

6ection 2 of this 'a'er outlines commodity ta theory and

the 'rinci'les of commodity taation% 6ection 3 eamines

the differences bet!een E+commerce and traditional trade

the unique taation issues that arise in the case of E+

commerce and !hether E+commerce should be taed or not%

6ection 4 looJs at some of the attem'ts at creatin" sound

'olicy by "rou's such as the OEC(% /n 6ection 5 the 'a'er

outlines the s'ecific 'olicies set forth by the Euro'ean

Union /ndia United 6tates and Australia% /t is the

'ur'ose of this section to sho! ho! 'olicies have evolved

and ho! they !ere formulated% $astly 6ection 7 !ill

include my concludin" remarJs follo!ed by an a''endi and

biblio"ra'hy%

10 C6C and 6UN /CO66&E6 <NE& #U6/NE66 6O$U&/ON #/ND6 &HE O&UNE

.500 /N&O &HE NE& ECONO= 200.

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, 1 CO M M O D ITY TAX TH EO RY

,/0 H ( Ta4#n5 E! !e"t$ M ar6et$

&aes are Jno!n to distort economic activity% &aes are

also used to correct distortions in the marJet'lace as

!ell% /n either case the end result is different from

economic activity !ithout restrictions%

Commodity taation has three roles B i- revenue collection

ii- inter'ersonal distribution iii- resource allocation..%

&he loss in the value of economic activity caused by taes

is Jno!n as deadw eight loss% /n the case s'ecific to

consumers it is referred to as excess burden or the added

cost to ta'ayers and society of raisin" revenue throu"h

taes%.2 &he four most !idely acce'ted 'rinci'les of "oods

taation areB efficiency equity sim'licity and

neutrality% &hou"h each of these 'rinci'les is correct

!ithin its o!n realm they often conflict !ith one another

and non+economic obIectives may also alter the course of

ta 'olicy%

,/, Pr#n"#p%e$ ! Ta4at#n

&he four 'rinci'les listed are !idely Jno!n as Adam 6mith*s

<our canons of &aation=.3%

.. Coady (avid and (reLe Kean <Commodity &aation and 6ocial @elfare

B &he Deneralised amsey ule= /nternational &a and >ublic inanceol 9 /ssue 3 ay 2002.2 AuerbachAlan K% M&aation and Economic EfficiencyM University of

California #erJeley 200. >a"e 4.3 6mith Adam <An /nquiry into the Nature and Causes of the @ealth of

Nations /ndiana'olisB $iberty Classics= olume // .98. ''% 825 +828%

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,/,/0 E! !#"#en"'

Efficiency refers to minimiLin" the overall ne"ative

effects of taation s'ecifically the dead!ei"ht losses of

taation% Accordin" to o'timal ta theory if the "oal is

to collect a "iven amount of revenue as efficiently as

'ossible ta rates should be set so that the com'ensated

demand for each commodity is reduced in the same

'ro'ortion% @hen the demand for each "ood de'ends only on

its o!n 'rice this is equivalent to the rule that ta

rates be inversely related to com'ensated 'rice

elasticities of demand%.4 &hus efficiency does not require

the equal taation of all "oods% Doods !ith inelastic

demands should be taed hi"her than "ood !ith elastic

demands and so on%

&aes are also often levied for reasons of holdin" 'eo'le

accountable for the social and 'rivate cost of their

activities% 6moJin" is an eam'le as such% 6moJers im'ose

hi"her costs on 'ublic health care systems and thus their

activities are taed at a hi"her rate in order to

incor'orate that eternality%

.4 osen (ahlby 6mith #oone M>ublic inance in CanadaM >a"e 429

2nd Canadian Ed% cDra!+Hill yerson 2003

- 10 -



PP Stax

SS

New

C.S. P1P1

Tax

Revenue

D.W.L.

P0 P0

P2

D1New

P.S .

D D0

Q Q

Q1 Q0 Q0 Q1

Consider the above dia"ram !here there are t!o "oods A and

# that are substitutes% @e start off at > 0 P 0 in both

marJets% /f !e !ere no! to im'ose only a ta on marJet A

the su''ly in that marJet is reduced causin" the 'rice to

rise to > . and the quantity su''lied is reduced to P . in

marJet A% &rian"le abc sho!s the total dead!ei"ht loss of

im'osin" the ta% > . is the 'rice 'aid by the customer and

>2 is the amount received by the 'roducer%

#y a''lyin" this ta on "ood A it is no! more attractive

for consumers to 'urchase "ood # because there is no taon it and its 'rice is relatively lo!er% &his causes the

demand for Dood # to increase from ( 0 to ( .% Holdin" all

other thin"s constant this causes the 'rice of Dood # to

increase and quantity su''lied also increases% &hus

overall 'rice and quantity increases in the marJet for

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"ood #% &his a''ears to be unfairto the sellers in marJet

A as their revenues and marJet has shrunJ by the im'osition

of a ta mean!hile sellers in marJet # are benefitin" from

it !ithout any chan"es !ithin marJet #*s subsystem% &his

leads to over consum'tion in marJet #% /n an effort to

equaliLe these effects so that both marJets are equally

affected 'lease looJ at the dia"ram belo!%

PPS S

P1 P1

P0 P0

P2 P2

D D

Q Q

Q1 Q0 Q1 Q0

/n this dia"ram the same amount of ta revenue is raised

and the overall dead!ei"ht loss has been reduced% Ho! can

this be accom'lished effectivelyQ

$ooJin" at this 'roblem from a different 'ers'ective !e

are basically tryin" to attain an o'timum level of taation

that !ill lead to the hi"hest 'ossible level of overall

utility for the consumer mean!hile tryin" to "enerate a

tar"et revenue and this is enca'sulated in the amsey

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ule% Coady and (reLe ,2002- tell us that the inde of

relative discoura"ement should be the same for all

unconstrained taes%

&he above illustration can be etended from t!o industries

to t!o countries as !ell% Consider the 'ossibility that one

country is tain" a "ood mean!hile the other is not or

conversely !here a non+resident of a country is not taed

on 'urchases% &his could lead to a lot of cross+border

'urchasin" to avoid taation% ,&his in turn leads to a ta

base erosion of both the countries if there is no non+

resident taation in the host country as !ell%-

urthermore this affects local merchants because their

revenues are declinin" as 'ersons continue to 'urchase from

abroad and avoid taes% 6inn ,.990- su""ests that in order

to avoid this sur"e in cross+border 'urchasin" there must

be a harmoniLation of ta rates es'ecially in free trade

re"ions%.5 6ince technolo"y allo!s us to maJe 'urchases from

abroad this is an im'ortant issue% &he 'roblem is ho! to

harmoniLe Q

,/,/, E78#t'

Equity is a 'rinci'le of taation that refers to the burden

of taation fallin" on individuals !ho <are obli"ed to

contribute in 'ro'ortion to their res'ective interests in

the estate=.7% urthermore Drove ,.914- tells us that <the

subIects of every state ou"ht to contribute to the su''ort

of the "overnment as nearly as 'ossible in 'ro'ortion to

their res'ective abilities= ,ability+to+'ay 'rinci'le-%

.5 6inn H%@ <&a HarmoniLation and ta com'etition in Euro'e%=

Euro'ean Economic evie! 34 489+504 .990.7 Droves Harold <&a >hiloso'hers= >a"e .. &he University of

@isconsin >ress .914

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&his has been inter'reted ,(o!ner 200.- to mean that ta

burden on an individual should corres'ond to the benefits

they receive% &his is !hat is Jno!n as the benefit

'rinci'le 'ut forth by Adam 6mith and later com'ounded u'on

by ills.1% Another a''lication of the same 'rinci'le brin"s

us to the sacrifice 'rinci'le of taation that tells us

that each individual should )sacrifice* an equivalent

'ortion relative to their income in the form of taes%

&he limitation to this 'rinci'le is that taes are levied

based entirely on the level of income one attains% /f !e

!ere to further study this 'rinci'le the fla! !ould be

evident almost immediately% or instance !e have t!o

individuals !ith the same income same a"e and !orJ in the

same industry% Ho!ever one of them has no children

mean!hile the other one does% Unfairly one individual may

be carryin" more burden relative to dis'osable income than

the other% Ho! does this relate to someone else !ho is

maJin" more than either of the t!o and lives in the same

areaQ

&here are t!o forms of equity that try and Iustify these

t!o differences both of !hich serve to 'rovide ethical

considerations into the levyin" of taes% &hey are

HoriLontal and ertical Equity% HoriLontal Equity refers to

the notion that <'eo'le in equal 'ositions Gshould be

treated equally=.8

% &his measure of equal 'ositions is

"enerally measured by some inde of !ealth or income% osen

.1 Neill Kon % M&he benefit and sacrifice 'rinci'les of taationB A

synthesisM 6ocial Choice R @elfare 2000 ol% .1 /ssue . '..1.8 osen Harvey 6 MAN A>>OACH &O &HE 6&U( O /NCOE U&/$/& AN(

HO/SON&A$ EPU/&M Puarterly Kournal of Economics ay18 ol% 92/ssue 2 '301

- 14 -



,/,/2 S#m p%#"#t'

&aes should be levied and collected in a manner that is

convenient and easy to understand for the ta'ayer%.9

Com'licated ta rules maJe it difficult for 'ersons to

understand and com'ly !ith them and it also maJes

monitorin" and enforcement more difficult for "overnments%

A delicate balance must be Je't bet!een Jee'in" 'olicy

sim'le and Jee'in" it Iust% As the tain" authority tries

to incor'orate more and more variables to try and encom'ass

all the 'ossible set of situations its maJes the system

more difficult and com'licated for even a learned 'erson to

understand% Ho!ever !e must succumb to the fact that

Iustice for all is not 'ossible for "enerally a''lied ta

rules% /t !ill suffice to try and achieve a "eneral notion

of Iustice%20

&hese set of rules must be available !ith ease to the

ta'ayer and must be easily understandable as !ell% &here

must be a system that su''orts the queries of these

individuals and that 'rocesses these ta claims as they

a''ear% Availability of ta rules is essential to

com'liance !ith them% &hus !ith the evolution of the

internet amon"st other thin"s ta authorities have

benefited "reatly from this technolo"y by even "oin" so far

as creatin" online ta filin" systems Gsuch as Australia

and Canada alon" !ith maJin" ta 'olicy more available to

the 'ublic%

.9 /&E> <&a >rinci'les B #uildin" blocJs of a sound ta system= >a"e

. 200420 Denerally a''lied rules can not encom'ass the total array of 'ossible

situations%

- 16 -



,/,/ N e8tra%#t'

&a neutrality refers to the effects that chan"es in

taation have on "overnment income% /f a ta chan"e has no

net chan"e on the "overnment*s ta revenues then the ta

is said to be revenue+neutral% /f the same amount of ta is

'aid by a consumer for eam'le before and after the

chan"e the ta is said to be incidence+neutral%

&he Jey conce't here is that of indifference% /f ta

neutrality is a''lied to a 'urchaser*s decision then the

taes 'laced on the different avenues of 'urchasin" the

"ood should not be discriminate a"ainst any of them% &he

'urchaser should be indifferent to buyin" under either

system% /f the conce't !ere to be a''lied to ca'ital

investment decisions s'ecifically in the case of ca'ital

im'ort or e'ort then the ta system should maJe the

decision maJer indifferent to investin" ca'ital

domestically or abroad% 6imilarly this conce't can be

a''lied to many other thin"s such as national neutrality

,'urchasin" decisions based on different ta Iurisdictions

!ithin a country-%

Ho!ever !e Jno! the above case not to be true% &here are

thousands of ta Iurisdictions !ithin North America alone%

ather than com'etin" !ith one another for businesses and

adIust ta rates !ithin their Iurisdictions a ta similar

to the sales ta has been introduced on remote 'urchases%

&his is one attem't to "et around the 'roblem of com'etin"

ta rates% Ho!ever the 'roblem s'ecific to the U%6% is

that of com'liance Gdiscussed in further detail in 2%4 and

5%3%

- 17 -



A sales ta is a 'ro'ortional ta because everyone 'ays the

same rate re"ardless of income and also the more you

consume the more you 'ay in taes: it*s relative to ho!

much you consume ,s'end-% A use ta is a sales ta im'osed

on out+of+state vendors for sellin" "oods !ithin their

Iurisdiction% A use ta is a''lied at the same rate as the

state*s sales ta%

- 18 -



,/2 1 CO N SU M PTIO N TAXATIO N

,/2/0 1 Term #n%5'

/n "eneral there are t!o different methods of taationB

direct and indirect% &hese are t!o methods of taation used

in 'ractice% &he "eneral distinction made bet!een them is

that direct taes are on income and 'ro'erty and are

usually 'aid )directly*% /ndirect taes are 'laced on

activities and not 'aid directly% Eam'les of direct taes

are income taes 'ro'erty taes inheritance taes and

social security char"es% Eam'les of indirect taes include

retail taes ecise taes tariffs and value added taes%

&hese "enerally tend to be re"ressive ,as the value of the

'urchase increases the 'ercenta"e 'aid on them decreases-

and are often criticiLed as 'lacin" a hi"her burden the

'oor% Historically indirect taes have remained under

federal Iurisdiction and 'rovinces have been ecluded from

im'osin" them% /nitially servin" as the main source of

revenue for the "overnment ,fur and tobacco e'orts e%

Canada- they no! re'resent a smaller 'ercenta"e of federal

revenues%2.

A use ta is a ty'e of sales ta ,indirect ta- that is

'laced on remote 'urchases to reduce local ta base

erosion% A use ta is a means of su''lementin" lost revenue

from sales taes% &hus sales taes are taes a''lied to

sales ori"inatin" !ithin a Iurisdiction and a use ta is

'laced on sales of remote ori"in% >lease note the

difference bet!een the t!o as they !ill not be used

interchan"eably hence forth%

21 osen ,2003- et al% >%7

- 19 -



,/ 1 N ATIO N AL SALES TAX <S/ <ALU E AD D ED TAX =<AT>

#elo! !e shall taJe a looJ at the characteristics of A&

ta systems and N6& ta systems% @e shall com'are them as

!ell% &he 'ur'ose of this section is to hi"hli"ht ho! the

ty'e of ta system under !hich a firm o'erates affects the

'rices that it faces and char"es its accountin" methods

and the amount of taes it 'ays%

,//0 1 <AT

alue added taes a''ly to the value added to a "ood or

service contributed by a firm throu"h the use of its

factors of 'roduction% &hus if a firm buys lumber from a

lumber com'any and 'roduces tables from the lumber the

lumber car'enter !ould 'ay A& on the value added of

convertin" the trees into useable lumber and the furniture

maJer !ould 'ay A& on the value added of turnin" lumber

into tables% A firm !ould 'ay A& by subtractin" the A&

'aid on its in'uts from the A& 'aid on its sales% &here

are three ty'es of A&B i- Consum'tion+ty'e A& ii- income

A& and iii- Dross >roduct A&%22 &he consum'tion+ty'e A&

is the only one used in develo'ed countries% /n Canada the

D6& is liJe a A& because it taes final 'urchases as !ell%

,//, 1 N ATIO N AL SA LES TAX =N ST>

National sales taes are collected by vendors on behalf of

the "overnment at the final 'oint of sale and not at every

stage of production.&he ta rate a''lied is usually a

fied rate% (e'endin" on the ty'e of 'roduct bein" sold

the rate may vary% /n "eneral ho!ever 'roducts are cou'led

22 #icJley Kames % <A alue+Added &a Contrasted @ith National 6ales

&a= Con"ressional esearch 6ervice &he $ibrary of Con"ressDovernment and inance (ivision 6e'tember 2004

- 20 -



to"ether in broad "rou's and each !ithin its cate"ory has

the same ta a''lied% #icJley ,2004- tells us that ideally

the 'rice of the "oods equals the sum of the value added at

all sta"es of 'roduction and thus a A& or N6& a''lied at

the same rate !ould yield the same ta base and equal

revenue% He lays out for us the follo!in" differences that

maJe one system 'referable over the other%

,//2 1 N ST < S/ <AT

A?m #n#$trat#&e "$t$

A N6& system does not require firms to collect ta

information and 'ay taes if no final sales have been made

althou"h a A& system does% /f a firm is usin" a credit

method of collection under A& it is required to Jee' all

invoices that may be subIect to an audit% &his maJes the

A& system more e'ensive to maintain%

En!r"em ent

Under a A& system firms have an incentive to double+checJ

their re'orts to ensure accuracy for t!o reasons% &hey

!ould firstly double+checJ to maJe sure that they are

remittin" the ri"ht amounts and secondly there is a

"reater chance of them "ettin" cau"ht if the re'orts are

falsified because the "overnment may cross+checJ the

results !ith the re'orts of their su''liers% &hey may

ho!ever be able to collude to"ether to falsify both

re'orts but the N6& has neither a cross+checJin" nor a

self+checJin" mechanism at all% &herefore !e may e'ect

hi"her com'liance rates !ith A& and better enforcement%

D 8%e Ta4at#n ! G ?$ an? Ser&#"e$

(ouble taation occurs !hen in'uts or "oods are taed

multi'le times as one seller sells them to the net% /n a

A& system this may be avoided because in'uts are ta

- 21 -



deductible% Under a N6& system firms !ould have to 'rovide

eclusion certificates to su''liers before maJin" the

'urchase% Eclusion certificates are state issued

certificates to manufacturers to avoid double taation%

Also 'revious attem'ts at avoidin" double taation at the

state level have failed thus maJin" it more cumbersome and

inefficient to avoid double taation under a N6& system

o''osed to a A& system%

M a4#m 8m Ta4 Rate

/t may be said that due to increased levels of enforcement

Gand "ettin" cau"ht and voluntary com'liance by merchants

the incentive to evade taation is reduced under a A&

system% &hus #icJley ,2003- tells us that the ta rate for

a A& may be raised to a level hi"her than a N6& before a

ta evasion issue arises% On the other hand hi"her

com'liance rates mean hi"her 'robability of "atherin" taes

that !ould other!ise not be re'orted so ta rates could be

lo!ered to raise the same amount of revenue because more

'eo'le are com'liant% Equally so they may be raised to

"enerate more revenue%

T#m e R e78#re? t Im p%em ent

&he A& system !ould taJe more time to im'lement than a N6&

system sim'ly because the A& a''lies to many more firms

and 'ersons must be tau"ht the ne! ta rules% Also the A&

is more com'licated than the N6&%

<#$##%#t'

A A& is less visible to consumers as they !ould believe

that at least 'art of the A& !ould fall on 'roducers at

different sta"es of 'roduction: this is not so% Almost the

entire burden of both A& and N6& falls u'on the consumer%

Consum'tion taes !hether 'laced on consumers or

manufacturers are described as bein" 'aid by the consumer

- 22 -



because it is believed that consumers are less fleible

than 'roducers% >roducers can also 'lace the entire ta

burden on to the consumer by raisin" 'rices equivalent to

the ta they are to remit% 6ince the N6& is 'aid u'front by

the customer at the retail level they may feel that the

burden is u'on them more so% A& le"islators also have the

o'tion to choose !hether the amount of ta levied should be

'rinted on the recei't mean!hile under N6& the amount of

ta 'aid has to be e'licitly !ritten on the recei't% $ess

visibility may maJe consumers feel more comfortable about

consumin"%

- 23 -



2 1 TAX AN D E-CO M M ERCE

2/0 1 E-"m m er"e <$/ Br#"6-An?-M rtar

/t is useful to thinJ of E+commerce in terms of three

com'onentsB su''ortin" infrastructure electronic business

'rocesses and electronic commerce transactions%23 &he

su''ortin" infrastructure consists of electronic com'onents

that are used to carry out core business functions% Also

it 'rovides su''ort for the com'anies* eistence on the

internet itself% &his includes any hard!are and soft!are

used as !ell as all human ca'ital invested in the secure

o'eration of the enter'rise% /n essence the su''ortin"

infrastructure is the bacJbone of the system%

E+commerce business 'rocesses are the same as those of

traditional business ece't that these 'rocesses are

carried out usin" com'uters over a net!orJ24% E+commerce

transactions are concluded usin" any method of 'ayment made

to an online merchant for services'roducts furnished% Note

here ho!ever that 'ayment does not need to be made online:

traditional methods of 'ayments may be used to maJe

'ayments% ethods of 'ayments include the credit card

method of 'ayment and some "eneric methods of 'ayment

desi"ned s'ecifically for use on the internet such as

>ay'al% Ho!ever in order for a transaction to be

23 esenbour" &homas $% <easurin" Electronic #usinessB (efinitions

Underlyin" Conce'ts and easurement >lans= Economic >ro"rams #ureau

of the Census T htt'B!!!%census%"ove'cd!!!ebusines%htm $ast

ie!ed 6uccessfully on (ec 3rd 2004%

24 A net!orJ is 2 or more com'uters connected to"ether for the 'ur'oses

of communication%

- 24 -



considered a 'art of E+commerce revenue the agreem ent to

purchase m ust be m ade online%25

&hus if the internet is used to "ather information

re"ardin" the 'urchase of a "oodservice and then 'ayment

is made in 'erson then this is not considered E+commerce

revenue% /n this s'ecific case E+commerce has hel'ed to

facilitate sales not bear them%

&he most basic advanta"e that E+commerce has over

traditional business is that of convenience% &his

convenience allo!s consumers to access information from

their choice of location% &his convenience also translates

into the convenience of business mobility and the ability

to u'date and access information quicJly% &his does not

mean that businesses can chan"e their location 'er se as

their central G'hysical location has the same 'ro'erties

attached to it as those of a conventional merchant%

Ho!ever they may choose and move their servers !ith

relative ease to 'ossibly avoid taation% E+commerce allo!s

for real-tim e monitorin" of inventories and adIustments of

'rices% Althou"h the lar"er of the traditional retailers do

have means of real+time monitorin" they do not enIoy the

ability to adIust 'rices in real+time27% E+commerce allo!s

savin"s on valuable )menu* costs%

25 esenbour" &homas $% <easurin" Electronic #usinessB (efinitions

Underlyin" Conce'ts and easurement >lans= Economic >ro"rams #ureau

of the Census T htt'B!!!%census%"ove'cd!!!ebusines%htm $ast

ie!ed 6uccessfully on (ec 3rd 2004%

27 eal time refers to the ability to have immediate a''lication of

modifications% eal time means there are no ,si"nificant- delays andis equivalent to sayin" the chan"es are bein" made )$ive*%

- 25 -



Core strate"ic decisions are technolo"y based in E+

commerce !hereas in traditional businesses technolo"ical

decisions are usually not 'art of business strate"y% &his

reliance on electronic media to carry out core functions of

the business can also lead to 'roblems !hereby the com'any

!ould have to "o offline ,<close sho'=- tem'orarily until

the 'roblem is solved%21 Equally so an advanta"e of bein"

an e+business is that there are no hours of o'eration i%e%

the sho' is al!ays o'en%

&he "eneral means of communicatin" !ith 'otential customers

is electronic% &here is often no human interaction in #2C

transactions% Consumers are allo!ed to bro!se and sho'

around as much as they liJe !ithout the 'ressure of

sales'ersons and ultimately the 'urchase decision is

entirely u' to them%

An eam'le of E+commerce that most 'eo'le are familiar !ith

is AmaLon%com% AmaLon ,for short- is one of the "iants of

the E+commerce industry% /t acts as a !holesaler for

smaller firms located 'redominantly !ithin North America

but it has also established itself in the U? Ka'an

rance and Dermany% /ts main 'resence is online only !ith

a cor'orate headquarters in 6eattle @A%28 &he !ebsite

offers a variety of 'roducts ran"in" from electronic

consumer "oods booJs baby 'roducts to Jitchen R "arden

'roducts% AmaLon "rossed F3%93 billion in 2002 alone29

%

any online merchants chose to follo! the AmaLon model of

21 Eam'les may include 'o!er outa"es hard!are or soft!are failure or

malicious attacJs from unJno!n sources% 28 / !as in contact !ith AmaLon Customer service this information !as

obtained via email AmaLon%com Customer 6ervice29

6alJever Ale% <Ho! AmaLon O'ens U' and Cleans U'= #usiness @eeJa"aLine Kune 2003

- 26 -



conductin" business ,a sin"le 'oint of sale for many

merchants- s'ecific to their o!n marJets%

As in the traditional retailin" case !ord of mouth is a

maIor contributor to future sales% Customer o'inions are

o'en to anybody in the !orld on the internet as o''osed to

a certain locale thus 'ertainin" to either 'ositive or

ne"ative ri''le effects ar"uably more si"nificant than

those in the traditional case% &he "lobal a''lication of E+

commerce allo!s for an indefinite amount of com'etitors% As

ne! com'etitors arrive into the marJet'lace on a daily

basis the end result is a very fierce com'etitive

environment%

2/, @ +at U n#78e Ta4at#n I$$8e$ Ar#$e

(ue to its infancy as a form of business there is a lacJ

of industry standards for E+commerce as o''osed to

traditional businesses% A number of issues arise because of

the nature of E+commerce itself% &he analysis outlined

belo! identifies unique issues s'ecific to E+commerce that

set it aside from traditional trade issues% Annette Nellen

has collected a meanin"ful list of issues related

s'ecifically to E+commerce discussed belo!%30

# 8r#$?#"t#n #$$8e$ 1

Eistin" ta systems de'end on the 'hysical location of

businesses to determine !hat Iurisdiction they fall under%

/n order to 'rove this obli"ation it must be 'roven that a

firm has a >ermanent Establishment ,>E- or Neus 'resent in

30 Nellen Annette% <E+commerce B &o &a or Not to &a Q &hat is the

Puestion V Or is it Q= >a"e .4 6an Kose 6tate University 200.

- 27 -



the controlled area% A >E may be "enerally defined as any

location that facilitates <the carryin" on of the business

of the enter'rise throu"h this fied 'lace of business=%3.

E+commerce allo!s firms to have very little 'hysical

'resence in an area if they so !ish% &his lacJ of 'hysical

'resence is attributable to the mobility of the E+commerce

business model% @hen a firm falls under the tain"

Iurisdiction of a state it must collect use and sales

taes on behalf of that state as !ell as remit other taes

that it !ould normally be required to% $ocation factors

usually raise ta issues at the state local and

international level%32 &he question then arisesB because

'ersons are consumin" "oods !ithin the boundaries of a

country u'on !hom does that country im'ose use taes the

seller or the buyerQ An ar"ument can be made for either

case G6ee 6ection 3%4% &his is a central issue in the E+

commerce ta riddle because ta authorities can not 'roceed

!ithout Jno!led"e of !here the ta burden lies% A tem'orary

solution used by the U%6% to solve this issue has been to

im'ose a ta moratorium on E+commerce businesses until a

frame!orJ can be established%

An im'ortant element of this question 'osed is that one can

easily assume that both the seller and the buyer are in the

same Iurisdiction% Com'leities arise !hen sales are made

by manufacturers to consumers in a different Iurisdiction%

3. OEC( Committee on iscal Affairs MC$A//CA&/ON ON &HE A>>$/CA&/ON O

&HE>EANEN& E6&A#$/6HEN& (E/N/&/ON /N E+COECEBCHANDE6 &O &HECOEN&A ON &HE O(E$&AW CONEN&/ON ON A&/C$E 5M OEC( (ecember200032 Nellen Annette% <E+commerce B &o &a or Not to &a Q &hat is the

Puestion V Or is it Q= >a"e .3 6an Kose 6tate University 200.

- 28 -



this to ha''en there must be 'roof of a >ermanent

Establishment ,>E- or Neus% &he definition of source in

traditional ta theory is <the 'lace !here !ealth is

'roduced that is the community of economic life !hich

maJes 'ossible the yield of the acquisition of the !ealth%

&his yield or acquisition is due ho!ever not only to a

'articular thin" but to the human relations !hich may hel'

in creatin" them=34% &hus by havin" a 'hysical 'resence or

a sellin" a"ent !ithin a Iurisdiction that state then has

the ri"ht to ta any "ood 'roduced !ithin its borders

re"ardless of !here it is sold% &he main advanta"e of the

source+based 'rinci'le is !ith reference to income: it

avoids double taation% @hen a''lied to cross+border

commerce businesses !ould other!ise be required to maJe

'ayments to ta authorities other than their o!n de'endin"

on the definition of >E established by that state%

ii- Nature of the 'roducts

Althou"h this is outside the sco'e of this 'a'er it is

still an im'ortant as'ect of the issues surroundin" E+

commerce ta 'olicy% any forms of di"itiLed "oods may be

sold and offered on the internet such as music documents

ne!s'a'ers and customiLed information% &here is also a

'roblem of >E considerations and ho! to Iustly a''ly taes

to these 'roducts% /n a destination+based system there are

no 'hysical controls ,such as customs- to im'ose use taes

on the 'roducts before users can obtain the "oods and in a

source+based system it is difficult to establish !here

eactly the contract of a"reement tooJ 'lace% G&here is a

'lethora of information available on the ta im'lications

34 orst (avid $% <&he Continuin" itality of 6ource+#ased &aation in

the Electronic A"e= &a Notes /nternational .991

- 30 -



of each of these scenarios%35 A "reater 'roblem ho!ever is

that of monitorin" this activity% Ho! is it 'ossible for

authorities to Jno! that a di"ital 'roduct has echan"ed

handsQ 6o far a strict division bet!een tan"ible and

intan"ible "oods traded online eists% &hou"h hard to

conceive a semi+tan"ible 'roduct it may ha''en in the

future%

iii- Ne! ty'es of Assets

any of the assets that are critical to identification of

an e+business are intan"ible in nature such as the domain

name ,!!!%!eb'a"e%com- the !eb+'a"es that lie !ithin the

!ebsite and the soft!are used ,or develo'ed s'ecifically-

for use and o'eration of the business% Evaluation is a

'roblem of these intan"ible "oods for ta and accountin"

'ur'oses% or eam'le ho! !ould one determine accrued

amortiLation on domain name re"istryQ &hus these ne! ty'es

of 'ro'erty have accountin" and ta im'lications%

iv- aJin" o'timal use of the internet may challen"e old

rules

Nellen "ives a 'erfect eam'le of a non+'rofit or"aniLation

that sets u' a donation service on its !ebsite%

&raditionally one is required to maintain a recei't of

'hilanthro'ic activity for ta deduction 'ur'oses% &he

'roblem here althou"h not so com'le ,the or"aniLation can

mail a recei't to the individual- may become com'le in

other circumstances% An eam'le mi"ht be a !ebsite that

35 6ee or Eam'le oster >e''er R 6hefelman >$$C M>ro'osed Ne! $a!sB

Chan"in" the ules of Contract ormationM % #ro!ns!ord and D% Ho!ells<@hen 6urfers 6tart to 6ho'B /nternet Commerce and Contract $a!=#radley K% reeman <Electronic Contracts under Canadian $a! A>ractical Duide= Hill v% Date!ay 2000 /nc udder v% icrosoft Cor'%

- 31 -



'ays individuals for visitin" !ebsites of businesses that

advertise !ith them% (oes the state have a ri"ht to ta

that income "enerated under the su'ervision of a firm that

does not eist !ithin its borders Q

v- Other /ssues

Electronic means of communication and the electronic front

that e+businesses o'erate on allo! the scatterin" of their

!orJforce over the "lobe% /ncome re'ortin" may become an

issue under such circumstances% &here is also the issue of

!hat !ill suffice as 'roof for transactions conducted over

the internet ,di"ital si"natures et cetera-%

&he E+commerce ta issue is surrounded by the idea of

source+destination ta accountability% &his business model

is very similar in nature to another case in recent

history% &he net section dra!s similarities bet!een E+

commerce and the ail Catalo"ue industry to identify the

Jinds of taation that are useful% 6ince similar issues

!ere raised !hen the ail Catalo"ue industry first emer"ed

it may serve as a "uide for ta 'olicy on the internet%

- 32 -



!ere not a''licable to the la!s of @ashin"ton state since

they did not o'erate in that Iurisdiction%

&he U%6% 6u'reme Court u'held the ta statin" that it !as

not a ta on interstate commerce but rather a use ta%31

&hus this case 'rovided basis for other states to start

'lacin" use ta on remote sales% #y the .970*s all states

!ith sales taes had 'assed some form of use ta%38

/t !as found that des'ite not havin" an established

'resence !ithin a state a vendor is liable to 'ay use ta%

&he case of Nelson v% ont"omery @ard ,.94.- established

that if a firm has a 'hysical 'resence in a state then it

has to remit all taes a''licable in that state% &his

includes the 'resence of seller*s em'loyees inde'endent

contractors stocJ of "oods ,!arehouses- re'resentatives

or a"ents taJin" orders for an out+of+state seller%39 &his

relationshi' established the required Nexus to ta a

com'any% @e can almost immediately see ho! this relates to

the remote sale ta dilemma re"ardin" E+commerce to be

discussed later%

2/2/, N at#na% Be%%a$ H e$$) In"/ &$/ D epartm ent ! Re&en8e

State D epartm ent ! I%%#n#$

National #ellas Hess !as a mail order com'any based in

?ansas City issouri% All orders 'laced !ere 'laced

31 6ilas ason Co% v% &a Commission of 6tate of @ashin"ton 302 U%6%

.87 58 6%Ct% 233 ,.931-38 $undy ?athleen >% M&he &aation of E+commerceB &he /na''licability

of >hysical >resence Necessitates an Economic >resence 6tandardM &heichmond Kournal of $a! and &echnolo"y olume /// /ssue 2all 200.39 artie Charles @% </ssues in Use &a AdministrationB /ncreasin" the

Com'liance ate= in Collectin" &aes in the Cybera"e .999%

- 34 -



throu"h the mailin" system% &his firm had no established

neus in the 6tate of /llinois%

/n .971 the 6tate of /llinois obtained a Iud"ment a"ainst

#ella Hess to collect use ta on "oods sold !ithin

/llinois% &he Court cited that it has never held that a

6tate may im'ose the duty of use ta collection and 'ayment

u'on a seller !hose only connection !ith customers in the

6tate is by common carrier or the United 6tates mail%40

&en years later in National Deo"ra'hic 6ociety v%

California 6tate #oard of EqualiLation ,.911- National

Deo"ra'hic !as required to remit use ta because they had

t!o in+state offices mainly there for advertisin"

'ur'oses%4. &his !as enou"h to establish a Neus !ithin the

state and thus 'ermitted the state to collect use taes%

/n .985 after a t!o year study the Advisory Commission on

/nter"overnmental elations ,AC/- su""ested that Con"ress

ado't federal le"islation to require out+of+state vendors

to collect sales and use taes and remit them to the 'ro'er

authorities%42 AC/ at the time estimated that F2%2 #illion

in use taes !ould be collected if this system !ere

administered 'ro'erly% Ho!ever >om' ,.99.- tells us that

that this effort !as fruitless% urthermore he mentions

that businesses attem'ted to utiliLe the mail catalo"ue

industry to order office su''lies and the liJe to avoid

sales taes% &his is a 'rime eam'le of tax avoidance and

40 Duerriero ichael K% <@hatXs Net%%%or Neus /n 6tate And $ocal

&a= etro'olitan Cor'orate Counsel ma"aLine 6e't 2003

4. NA&/ONA$ DEODA>H/C v% CA$% EPUA$/SA&/ON #(% 430 U%6% 55. ,.911- 430

U%6% 55.42 AC/ <6tate and $ocal &aation of Out+Of+6tate ail Order 6ales=

A'ril .987

- 35 -



this is one of the central issues surroundin" the E+

commerce ta 'roblem% Net !e eamine the case of the Puill

Cor'oration%

2/2/2 Q 8#%% Crp/ &/ N rt+ D a6ta 033,

Puill Cor'oration !as a mail order com'any that had offices

and !arehouses in /llinois Deor"ia and California% &heir

main 'roduct !as office su''lies sold throu"h flyers and

catalo"s% Puill had no em'loyees or infrastructure set u'

in North (aJota and !as bein" sued for use ta% A maIor

'art of this case !as determinin" !hether ta 'olicy !as

im'edin" interstate commerce !hich in effect !ould be a

violation of the U%6% Constitutions* Commerce Clause%43 @hen

the case made its !ay to court the court declined to

follo! the #ellas Hess 'recedent based on B <the tremendous

social economic commercial and le"al innovations= of the

'ast quarter+century have rendered its holdin"

<obsoleGte=%44

&hus states are still 'rohibited from demandin" sales

taes from remote sellers in the sale of "oods be they via

mail tele'hone or internet orders%

Puill Cor'% continued to flourish in the years follo!in"

its court 'roceedin"s% /t !ent on to setu' an online

'resence !!!%quillcor'%com and that venture !as also a

success% /n .998 6ta'les Co% 'urchased Puill Cor'% mostly

because of its internet success database marJetin"

abilities and brand equity%45 6ta'les intended to establish

43 6cudder Keffrey A% <E+commerce B Choosin" the A''ro'riate &a

odel= aIor &hemes in Economics 200344 6u'reme Court of the United 6tates 410 N%@% 2d 203 208 ,.99.-

45 &roy iJe <PU/$$ >UCHA6E D/E6 6&A>$E6 E+>E6ENCE= (iscount 6tore

Ne!s ol% 31 /ssue 8 .998

- 36 -



its online 'resence throu"h the Puill Cor' and thus bou"ht

the com'any%

(ue to the results of the Puill Case a similar ar"ument is

made for not tain" E+commerce% /t may be ar"ued that

because the t!o forms of commerce are so similar in nature

Gout+of+state vendors that the same rules should a''ly to

both% &his ar"ument is 'resented in the net section%

- 37 -



2/ Pr an? Ant#-E-"m m er"e Ta4 Ar58m ent$

&here have been ar"uments made for and a"ainst the taation

of E+commerce since the issue first 'resented itself% or

some it may seem inconceivable that E+commerce !ould not be

taed and vice versa% &he ar"uments 'resented belo! ar"ue

both sides of the ar"ument and are meant to hi"hli"ht some

of the 'ractical moral and social issues that may arise

!hen decidin" to ta or not%

Pr:E-com m erce is a boom ing industry and has the potential

for great grow th. hus it is im perative that the correct

legal structure !including taxes" be put into place to

accom m odate new aspects of the technology as they em erge.

/t is almost natural for one to assume that because the

scale and sco'e of E+commerce is so !ides'read that the

'ersons involved in e+business are abusin" the current

)loo'holes* in the ta system to abstain from 'ayin" taes%

Ho!ever the truth of the matter is that in 200. a study

estimated that only 5 of the !orld 'o'ulation !as online47

and another estimates that in 2003 this number "re! to .041

of !hich 90 are from industrialiLed countries and nearly

a third are in America% 6o this 'roblem is re"ion s'ecific

the data sho!s and also the marJet for E+commerce is not

quite as lar"e as one mi"ht e'ect%

47 (ennis 6ylvia MKust 5 >ercent Of @orld OnlineM(ecember .. 2000 T

htt'B!!!%com'uteruser%comne!s00.2..ne!s.5%html $ast ie!ed BKuly 29th 200441 6harma (inesh C% M6tudy finds "a's in di"ital divide theoryM October

29 2003 T htt'Bmsn%com%com2.00+..04Y2+5098184%htmlQ'artZmsn $astie!ed B Kuly 29th 2004

- 38 -



#ruce o and urray48 ar"ue that there is no evidence that

the chan"es in ecess burden and the addition of

administrative and com'liance costs are hi"h enou"h to

!arrant an eem'tion of all E+commerce transactions nor is

there is any evidence that this ecess burden is hi"her

than alternative means of collective revenue%

Cn : E-com m erce is in its infancy# and applying taxes to

this industry could stifle its grow th and prevent future

grow th.A study by Austan Doolsbee and Konathan Sittrain

,.999- estimated the sales ta loss to local and state

"overnments came to a''roimately F2.0 million !hich is

less than 0%25 of overall ta revenues% Ho!ever they

estimate that this !ill rise to a''roimately .0 by the

year 2001%49 &he study si"nifies the tremendous "ro!th

'otential of E+commerce and thus if left untaed the "reat

'otential for ta base erosion% Althou"h at first it may

a''ear that the amount of ta erosion is minute there is

'otential for much "reater losses in the future% &he

ar"ument does not bear merit !hen E+commerce reaches its

more mature sta"es as a technolo"y%

A .998 study by #oston Consultin" "rou' found that the to'

four cate"ories of online sales are Com'uter "oods

inancial services Auctions and &ravel%50 Of these four

travel and financial services are not taable Gno sales

ta thus there is no loss in revenue from this activity%

48 #ruce (onald and o @illiam and urray atthe! M&o &a Or Not

&o &a Q &he Case of Electronic CommerceM Contem'orary Economic>olicy ol% 2. /ssue . '25 Kan200349 DoolsbeeAustan and SittrainKonathan <Evaluatin" the Costs and

#enefits of &ain" /nternet Commerce= ay 20 .999%50 #oston Consultin" Drou' and 6ho'%or" <&he 6tate of Online

etailin"= November .998

- 39 -



Also included in the auctions fi"ure is consumer+to+

consumer 'urchases such as on e+bay on !hich no sales ta

is due either%

Pr: Not taxing E-com m erce w ill harm $m ain street’

m erchants w ho are sub%ect to sales tax# and this w ould

erode tax bases.&he ar"ument bears merit !ithin itself in

that it !ould be unfairnot to ta E+commerce 'urchases and

subIu"ate traditional retailers to sales ta even thou"h

they may be sellin" the eact same 'roduct ,or service-%

&his may also lead to many conventional businesses to "o

the E+commerce route all the !ay and abandon their 'hysical

'resence in an effort to avoid 'ayin" taes% eferrin" bacJ

to the 'rinci'le of vertical equity not tain" E+commerce

and leavin" main street merchants taed !ould be unfair to

lo!+income families !ho either do not have the facilities

or the education to utiliLe the advanta"es 'osed by E+

commerce%

Cn:&f E-com m erce is taxed then due to the ease of

relocating# e-business firm s w ill locate them selves in tax

havens to avoid paying sales and use taxes. his m ay cause

states to engage in a bidding eff ort to reduce taxes to

accom m odate business presence.&his is a very valid threat

and an etreme eam'le of tax avoidance% @ithin minutes it

is 'ossible to )move* a !ebsite from one country to

another and thus avoid some ty'es of taes% Already there

are many com'anies that offer settin" u' )offshore* !eb+

hostin" services to taJe advanta"e of !hat they call )ta

- 40 -



'rice for internet access that !ill be taed% &hus anybody

usin" )basic* internet 'acJa"es under the floor 'rices !ill

not be taed for their usa"e% Anythin" over and above that

!ill be considered a luury 'acJa"e and thus taed

accordin"ly% &his is more an ar"ument a"ainst tain"

internet usa"e than internet 'urchases%

Doolsbee ,.999- notes ho! it is im'ortant to Jee' an o'en

frame of mind about this situation% He ar"ues that for

eam'le rou"hly 20 of com'uter 'urchases are made by

consumers directly from manufacturers% One of the maIor

com'uter 'roducers in the U6A is (ell and they have an

available o'tion to 'urchase com'uters online% Kust because

the internet is not available to a consumer that does not

mean that 'urchases can not be made from (ell% &here is

still the available o'tion of usin" the tele'hone%

&herefore the 'oint Doolsbee is tryin" to maJe is that

the 'roblem is much broader than internet vs% traditional

retailers as the non+availability of the internet may not

hinder sales from online merchants and also the non+

availability of the internet does not mean that those same

'urchases !ould be made at merchants on ) ain streetGsame

Iurisdiction%

- 42 -



1 Attem pt$ at P%#"'

/0 1 O ECD

&he Or"aniLation for Economic Co+o'eration and (evelo'ment

,OEC(- is an or"aniLation that hel's "overnments deal !ith

some of the challen"es of livin" in a "lobal society%

Currently there are 30 member countries that com'rise of

the OEC(% &hese members include Austria Australia

#el"ium Canada 6!itLerland U%? and the United 6tates%

OEC( mainly deals !ith economic social trade and

"overnance issues and to create 'olicies that !orJ%

Currently the 'roblem has been that of !ei"hin" the 'ros

and cons of the ar"uments 'resented above each of !hich

bein" taJen into account !hen creatin" sound 'olicy% 6ince

the 'olicy has to be a''licable to a number of states a

"eneral solution that the OEC( has to !orJ to!ards is that

of ta harmoniLation to avoid ta dis'utes and a system

that is sim'le and fair at the same time%

@ith re"ard to the taation of E+commerce the OEC( has

carried out many studies that are s'ecific to the heart of

the subIect53% 6ince E+commerce is a trans+border method of

carryin" out business activity it has thus been much more

im'ortant to Jee' the international frame!orJ in mind !hen

dealin" !ith any 'olicy issues%

/n October .998 the OEC( inisterial Conference !as held

in Otta!a Canada% &his conference laid the "rounds for the

<OEC( Action >lan or Electronic Commerce=%

53OEC( + <E+commerce &a B A sober vie! of Cybers'ace= (avid Holmes

2002: <A borderless @orldB ealisin" the 'otential of "lobal ElectronicCommerce= OEC( .998 : <&he Economic and 6ocial /m'act of ElectronicCommerce= OEC( .999

- 43 -



&he action 'lan entails the follo!in" B52

• #uildin" &rust for Users and Consumers &o instill

confidence in di"ital marJet'lace%

• Establishin" "round rules for the di"ital marJet'lace

aJin" 'olicies that !ill ensure 'rotection for all

'arties involved Iust as there are in the 'hysical

marJet'lace%

• Establishin" "rounds for the information

infrastructure for electronic commerce &he "oal

behind this is to establish and maintain com'etition

in the communications industry in order to Jee' costs

'rices do!n and Jee' quality hi"h%

• aimiLin" the benefits of electronic commerce

aimiLin" both social and economic benefits to the

countries involved or"aniLations and consumers and

etend this model to develo'in" countries%

&he difference bet!een this meetin" and those before it isthat s'ecific "uidelines roles and res'onsibilities !ere

e'licated to member countries%

Also identified !ere the follo!in" 'rinci'les that should

a''ly to E+commerce taation la!sB54 neutrality efficiency

certainty sim'licity effectiveness fairness and

fleibility%

An im'ortant 'art of this accord !as that the develo'ment

of the E+commerce sector should be left to the 'rivate

sector to do themselves throu"h the use of ca'ital and

54 OEC( E+commerce >olicy #rief 200.

- 44 -



utiliLin" ne! technolo"ies as they emer"e% &his avoids

dis'utes over tariff+liJe arran"ements over claims that

"overnment assistance is allo!in" an industry in that

country to flourish%

&he OEC( commissioned a study by a &echnical Advisory Drou'

,&AD- to study the E+commerce ta issue% One of their maIor

"oals !as to identify the amount of different ty'es of

activity and methods of transactions that !ould constitute

E+commerce% &he &AD outlined 28 different 'ossible ty'es of

transactions55 thus 'rovidin" an available taonomy of the

transactions that !ould o'en the door for 're'arin" the

best 'olicy for each of the cate"ories% &he t!o relevant

cate"ories for us are Cate"ory .B <&he sale of tan"ible

"oods over the internet= and Cate"ory 23B <Online

Auctions= G#2C sales of tan"ible "oods only% &he re'ort

cate"oriLes these sales as 'art of business+'rofit Gthus

liable to different ta rules and not as royalties%

/n 200. the Committee of iscal Affairs 'ublished a e'ort

entitled <&aation and Electronic CommerceB /m'lementin"

the Otta!a &aation rame!orJ Conditions=% Alon" !ith

6mith*s 4 canons of taation the CA calls for another

'rinci'le to be included in taation issuesB leibility

&a systems should be fleible and dynamic enou"h to Jee'

'ace !ith commercial and technolo"ical develo'ments%57 &he

CA "o on to define a >ermanent Establishment ,>E- as <a

fied 'lace of business throu"h !hich the business of an

55 &echnical Advisory Drou' on &reaty Characterisation of Electronic

Commerce >aymentsM&AW &EA& CHAAC&E/6A&/ON /66UE6 A/6/ND O E+COECEM ebruary 200. OEC(57 OEC( </m'lementin" &he Otta!a &aation rame!orJ Challen"e=

,#reifin"- Committee of iscal Affairs >a"e . 2000

- 45 -



enter'rise is !holly or 'artly carried on= !hich is crucial

to the ar"ument of establishin" neus% E'licitly ecluded

from this definition are facilities used solely to store

dis'lay or deliver the "oods%

One of the maIor contributions of this study is the

su""estion that consum'tion taes on cross+border trade

should taJe 'lace in the location !here consum'tion taJes

'lace% Also that an international consensus should be held

for ta on "oods en route to other locations or bein"

!arehoused ,this has to do !ith !hether these 'rocesses add

value to the 'roduct or not-%51

&his a''lies to #usiness+to+

#usiness transactions% or #usiness+to+Consumer

transactions the 'lace of consum'tion is the Iurisdiction

!here the 'urchaser resides and thus that Iurisdiction

!ould im'lement use taes on those 'urchasers !ithin its

borders% &his refers to the destination+based sourcin"

'rinci'le referred to earlier%

/n another re'ort "uidelines !ere laid out on ho! to avoid

multi'le taation of E+commerce activity or conversely

unintentional non+taation58 Gnot tain" "oods that should

be taed% &he re'ort calls for 'artici'ants to !ait

'atiently until allcountries a''ly the destination based

taation 'rinci'le or until consistent rules are com'iled%

&he same recommendation !as made for uniform definition and

verification controls%

51 OEC( </m'lementin" &he Otta!a &aation rame!orJ Challen"e=

,#reifin"- Committee of iscal Affairs 200058 OEC( </m'lementin" &he Otta!a &aation rame!orJ Challen"e=

,#reifin"- Committee of iscal Affairs >a"e 3 2000

- 46 -



Ho!ever it must be noted that the res'onsibility for

collectin" D6& ,A& in some Iurisdictions- remains !ith the

seller51 ,>a"e 20-% All a''licable taes must be collected

at the time of the transaction as chances of correctin"

this error are minimal in later sta"es% &his is obviously

creates difficulty for the sellers as they must remit

taes to different Iurisdictions around the !orld% or

eam'le if / 'urchased a "ood online from a com'any in

>aJistan they must remit the D6& to the Canadian

Dovernment%

/, 1 O t+er E! !rt$

&here have been other efforts made by "rou's such as

UN/C/&A$ and the @&O% Ho!ever none have been as

com'rehensive as the efforts of the OEC(% &hey do not

'ossess the sim'licity or thorou"hness that the OEC( model

offers% A close second !ould have to be an advisory

committee re'ort those 're'ared by )&he Koint enture &a

>olicy Drou'* in arch 2000% &hey 'ro'osed .. 'ossible

alternatives meant to a''ease different 'arties and

different 'arts of the E+commerce ta riddle G6ee &able 3

A''endi%59

59 Koint enture &a >olicy Drou' <6ummary of A''roaches or A''lyin"

6ales and Use &aes to E+commerce= 6ilicon alley Net!orJ 2000

- 47 -



. 1 Ca$e St8?#e$

&his section of the 'a'er intends to observe !hat real life

'olicy has been ado'ted by a select "rou' of countries% &he

subIects of this section are the EU United 6tates /ndia

and Australia% Each s'ecific subIect has been chosen due to

either their monumental involvement in the E+commerce ta

issue or because of distinct features of the country that

!ould maJe its E+commerce ta 'olicy more interestin"%

Ultimately these countries are meant to re'resent differin"

!ays of handlin" the same 'roblem and !ill assist in

tryin" to understand !hy sound economic theory is not

al!ays easy to translate into reality%

or each of the countries there is a table in the a''endi

that sho!s 'o'ulation e'ected internet 'enetration

e'ected transactions over /nternet for a "iven date ho!

much of that transaction is #2# and their conce't of a

'ermanent establishment ,>E-%

./0 1 EU

/n 2004 the Euro'ean Union consisted of .5 Countries%

Another .0 accession countries !ere 'ermitted to Ioin in

2004% &he EU commission is more than half a century old

and their "oals include maintainin" the overall "eneral

'ros'erity of the re"ion and free flo! of "oods 'eo'le

and ca'ital !ithin the union% (evelo'in" 'olicy for the

"rou' of nations on emer"in" ne! "rounds is also 'art of

the directive of the commission% &he 'roblem that sets the

EU aside from the others is that the 'olicy that it maJes

has to address the concerns of its members% &hus there is

added 'ressure and com'leity to each issue because of

harmoniLation%

- 48 -



AcJno!led"in" the economic 'otential for E+commerce in the

years to come the EU and U6 released a Ioint statement on

Electronic commerce in .991% &he U6 &reasury had first

initially made the statement the EU re'lied and they made

a Ioint statement follo!in" that% Here are some of the

'oints discussed and a"reed u'onB70

• /nternational coo'eration and coordination are

required in order to establish a frame!orJ that !ill

harness the 'o!er of the internet and its uses for

trade%

•

E+commerce !ill be an im'ortant robust en"ine for

"ro!th in the 2.st century%

• E'ansion of "lobal E+commerce !ill be marJet led

• Emer"ence of ne! la!s that inhibit trade should be

'revented and current ones removed%

• &aes on electronic commerce should be non+

discriminatory clear consistent and neutral%

•

<Close co+o'eration and mutual assistance to ensure

effective ta administration and to combat and 'revent

ille"al activities on the /nternet%=

&he findin"s of this re'ort led to the broader

acJno!led"ement of the taation issues re"ardin" E+

commerce culminatin" in the OEC( meetin" in Otta!a

Canada in .998%

70 PlinJs%net + <Koint E%U%+U%6% 6tatement on electronic commerce=

Thtt'B!!!%qlinJs%netcomdocseu+us%htm $ast ie!ed 6uccessfully on

(ec% 3rd 2004

- 49 -



&he EC ,EU commission- started the iscalis 'ro"ramme a

study of indirect ta systems on arch 30th .998%

7. &he

study !as initially set u' to allo! members to understand

the a''lications and !orJin"s of indirect tain" and then

to allo! for im'lementation !ithin the members

re'resentative countries allo!in" for 'ro'er

administrative techniques% $ater that year a re'ort !as

filed under the name of )E+commerce and /ndirect &aation*%

rom !hich / quoteB

<A& is a''licable to all su''lies of "oods and

services for consum'tion !ithin the EU regardless of

the m eans of com m unication or commercial mode used to

effect the transactions% &he EU A& system should

therefore 'rovide the le"al certainty sim'licity and

neutrality required for the full develo'ment of

electronic commerce%%%&he su''ly !ithin the EU of all

"oods and services is subIect to ta under eistin"

A& 'rovisions% &his is also the case for

im'ortations of "oods by businesses and individuals

and for the 'urchase by businesses of most services

from sources outside the EU%=72

&he statement encom'asses the 'roblem that E+commerce

'oses and 'rovides for it a sim'le res'onse that E+

commerce is no different from traditional commerce and

thus the same A& rules shall a''ly to them%

7. Euro'ean Union Commission M/N&E/ EA$UA&/ON E>O& ON &HE /6CA$/6

>ODAE .998+.999M 2002

72 Euro'ean Union Commission ME+commerce and indirect taationM .998

- 50 -



&his document is dated bacJ to .998% &he EU had already

setu' a decisive measure on ho! to ta E+commerce "oods

mean!hile many other countries !ere still debatin" !hether

to ta or not and ho! to ta%73 6ince the 'ro'osed A&

solution is based on current 'olicy the document "oes on

to recommend that current 'olicies by revie!ed because as

E+commerce continues to evolve ne! 'roblems !ill arise

that are not already !ithin the Iudicial restraints% Hence

ta administrators !ill have to constantly Jee' u' !ith ne!

occurrences and res'ond in due time%

&he 'ro'osed idea is that non+EU e+vendors re"ister !ith a

sin"le EU member and then deal Iust !ith that member in

terms of taation%74 &his !ill allo! vendors the convenience

of bein" dischar"ed of all obli"ations for the EU A& by

dealin" !ith a sin"le member% Also this !ill allo! e+

vendors to Jno! eactly ho! much ta to be a''lied to

transactions% 6o all use taes !ill be administered throu"h

one central location%

Under conventional EU A& systems out+of+state 'urchases

can be taed at the border or at the 'ost office or else

the remittance of the ta res'onsibility falls u'on the

buyer%75 clure 'oints out that if the transaction occurs

!ithin the Euro'ean Union and the vendor is a re"istered

trader then the remittance of the A& lies u'on the buyer

63 Kust for the saJe of the ar"ument the same A& 'rinci'les a''ly to

di"ital 'roducts do!nloaded as !ell% 74 Euro'ean Union Commission M>ro'osal for a EDU$A&/ON O &HE EUO>EAN

>A$/AEN& AN( O &HE COUNC/$B amendin" e"ulation ,EEC- No 2.892 onadministrative co+o'eration in the field of indirect taation ,A&-M200075 clure Charles E% <&aation of Electronic Commerce in the Euro'ean

Union= 2002

- 51 -



re"ardless of !hether it is a business or individual,s-% /f

the vendor is unre"istered and the sales quantity to that

member state are belo! a s'ecified threshold then those

sales are subIect to the A& of the state in !hich the

vendor resides% /f ho!ever the sales do eceed the

threshold the vendor is required to re"ister !ith the

state and collect A& on behalf of that state% /n this

re"ard clure concludes the EU A& is a destination+based

ta !ith the ece'tion of sales !ithin EU member states%

&herefore this hel's alleviate the 'roblem of com'etin"

ta rates amon"st nei"hborin" countries and those "oods

'urchased from outside the EU !ould be subIect to a use ta

if a''licable%

&he EU has been criticiLed by the U6 for eam'le for

taJin" an individualistic a''roach to the e+ta 'roblem

rather than !ait for international a"reement% Ho!ever /

believe that it is their 'roactive a''roach to the 'roblem

that has led others to do the same%

- 52 -



./, 1 IN D IA

6ince the mid .990*s /ndia has established itself as one

of the centers of /& and /&+enabled technolo"ies e'ortin"

in the !orld% /ndia has a boomin" soft!are and services

industry and soft!are is one of their chief /& e'orts% @e

can treat this as a "ood if the soft!are is 'roduced in

/ndia and then shi''ed usin" non+electronic means% /ndia

also has many online e+merchants that conduct E+commerce

!ithin its borders and to nei"hborin" countries%

/ndia s'ecifically has been chosen to be included in this

study for t!o reasons% irstly after China it is the

second lar"est economy in Asia to the 3rd !orld countries%

/ndia has a lo! literacy rate hi"h inflation and a

diminishin" middle+class% /& 'resents a 'otential for

substantial "ro!th that may allo! it to catch u' !ith more

advanced countries if not allo!in" it to be more

'ros'erous than its fello! 3rd !orld countries%

&he above outline of the /ndian demo"ra'hic a''lies to many

countries in Asia Africa and other 'arts of the !orld but

on a smaller scale 'erha's but the similarities sto' there%

&hus the second reason for choosin" /ndia is that it may

serve as a model for those other countries !hen all other

entities have been stri''ed do!n for the saJe of

sim'licity%

/ndian authorities have made it clear on many o''ortunities

that they su''ort the 'ro"ress of technolo"y in their

country and havin" added that a business+"overnment

collusion must be created to further 'ro"ress this

situation and maJe it a !in+!in situation for all 'arties

- 53 -



involved% &hus far none of the countries have mentioned

such a 'act%

/ndia has a 'o'ulation today of rou"hly .%2 #illion 'eo'le%/t*s one of the lar"est 'o'ulations in the !orld !ith only

China bein" similar in siLe% /ndia has been 'icJed as a

study subIect not only based on its 'o'ulation livin"

standard and location bein" in Asia but also because it

is !as ranJed at the to' of the Asian countries e'ected E+

commerce "ro!th bet!een .991 and 2003 !ith Com'ounded

Annual Dro!th ate ,CAD- of 247 'ercent as a"ainst the

CAD of Australia ,84 'ercent- 6outh ?orea ,.45 'ercent-

China ,243 'ercent- and Hon" ?on" ,..0 'ercent-%77 /ndia is

also be"innin" to be reco"niLed internationally for

'roducin" very 'rofessional !eb develo'ers and /&

'rofessionals% &hus it*s in /ndia*s better interests to

try and develo' their )e+marJet* for future "enerations

and to be able to e'loit the full 'otential of its current

e+develo'ers%

/ndia*s chief /& e'ort is soft!are% Annual revenues for

the year 200.+02 for soft!are and services sector came out

to s%480 billion ,F.0%. billion- u' from s%382 billion

,F8%4 billion- in 2000+0.% &his translates into overall

"ro!th of 27 'er cent in ru'ee terms and 20 'er cent in

dollar terms accountin" for 2 of D(>%71

77 6in"h NirviJar </N(/A*6 /NOA&/ON &ECHNO$OD 6EC&OB @HA&

CON&/#U&/ON &O #OA(E ECONO/C (EE$O>EN&Q= OEC( arch 2003

71 6in"h NirviJar ,2003-

- 54 -



/t !as found that <&he number of /nternet users in /ndia is

e'ected to "ro! from 0%5 million in .998 to 9 million in

2003 !ith one study estimatin" the number of actual

/nternet users to be 32 million in 2003%=78

At 'resent ho!ever most of the e'orts are "oin" to the

United 6tates follo!ed by Euro'e then Ka'an and the rest

of the !orld in decreasin" order%

/ndia 'assed its first E+commerce #ill =/nformation

&echnolo"y Act of /ndia= in 2000%79 (u""al mentions that

this act focused much on securin" !hat constitutes an

electronic transaction and !hat suffices as 'roof of an

electronic transaction% &his is not that sur'risin"

considerin" that /ndia is 'redominantly in the soft!are

industry ho!ever this !as a "iant lea' for the le"islative

forces !ithin /ndia% (u""al also mentions dis'arities of

'o!er dis'ersed and ho! the act had room still for

im'rovement%

/n the year .999 a )Hi"h >o!ered Committee* ,H>C- !as

formed that !orJed alon"side the OEC( to try and reform

some E+commerce ta la!s in /ndia% &heir "oals included

'roIectin" the overall "ro!th of the E+commerce industry in

/ndia !hether or not E+commerce and technolo"y transfers

should be taed studyin" the 'resent la!s in 'lace set by

nei"hborin" countries and those more technolo"ically

78 e'ort of the Hi"h >o!ered Committee on E+commerce and &aation ++

(ecember .7 200079 (u""al >avan <&elecommunications Conver"ence $a!s in /ndia A

critique = urdoch University Electronic Kournal of $a! ol 9Number . arch 2002

- 55 -



&he H>C re'ort maJes almost no mention of use and sales

taes% &heir main concern revolves around definitions and

direct taes ,income-% &here a''ears to be little or no

concern about cross+border flo!s of "oods 'urchased throu"h

electronic means% Ho!ever they a''ear to have ans!ered the

question indirectly this !ill be ans!ered shortly%

&he H>C chooses to define >E throu"h its (&As G(ouble

&aation A"reements !ith the U%6 and U?% $oosely its

definition of >E is < a fied 'lace of business throu"h

!hich the business of an enter'rise is !holly or 'artly

carried on%%% a 'lace of mana"ement %%% does not include

facilities used for stora"e dis'lay 'rocessin"

information collection advertisin" information su''ly

're'atory or auiliary in nature V=

&he H>C re'ort ho!ever does looJ at the 28 ty'es of E+

commerce activity and e'lains their 'osition on each of

them% &he only one relevant to this 'a'er is the sale of

'hysical "oods% Here the re'ort is silent other than ho! to

ta income and mentions that collection of sales or use

taes !ould be net to im'ossible to tracJ and monitor due

to the lacJ of an eistin" set u' in 'art due to the

landsca'e of the country% &he re'ort reco"niLes the need

for a more so'histicated ta monitorin" system% /t

acJno!led"es the inefficiencies of the 'resent system such

as the difficulty of communicatin" bet!een different ta

authorities the non+eistence of ta offices in some areas

of the country and the already eistent difficulty of

monitorin" traditional commerce activity% /n conclusion

the H>C re'ort states that it is im'erative that E+commerce

be taed because the 'otential amount of revenue "enerated

- 57 -



could be considerable% Althou"h earlier they mentioned they

had no means of measurin" ho! lar"e of a revenue could be

"enerated% &hus they !ill focus on their chief /& e'ort

soft!are for the time bein" and ho'e to reduce

inefficiencies in the administration of the ta system !ith

time% &he findin"s of the H>C !ere challen"ed by &he

Electronic Commerce &a 6tudy Drou' a "rou' of U%6+based

com'anies advised by >rice@aterhouseCoo'ers $$>%10 &hey

!arned that much of the E+commerce ta 'olicy administered

by /ndia could lead to retaliatory reactions by other

nations% &he t!o maIor ty'es of E+commerce taes that they

o''osed !ere those im'osed on im'orts of 'hysically traded

E+commerce "oods and soft!are im'orts%

10 Andrus Kose'h and errill >eter <EB E>O& O H/DH >O@EE(

CO/&&EE ON E$EC&ON/C COECE AN( &AWA&/ON= >rice@aterhouseCoo'ers#oston 200.

- 58 -



./2 U n#te? State$

&he United 6tates by far can be considered the most

im'ortant 'layer in the E+commerce taation dilemma% &he

U%6%A is the hub of most E+commerce activity and it is

also the country that is 'ushin" from all sides to try and

sto' the taation of E+commerce for reasons that !ill be

mentioned later%

Currently there are over 37000 state and local tain"

Iurisdictions in the U%6% ran"in" from states to local

im'rovement districts% A''roimately 1000 of these

Iurisdictions im'ose sales and use taes% Each state and

local Iurisdiction has variations in the !ay these conce'ts

are a''lied%1.

&he Clinton Administration cau"ht on to the effect E+

commerce !ould have very early% /n .993 it issued an a"enda

that !ould 'rovide a vision for the National /nformation

/nfrastructure ,N//-%12 &he N// 'ro'osed the idea of 'rivate

com'anies leadin" the further develo'ment of the

information a"e% &he a"enda set out to cultivate an

environment that !ould 'rovide incentives for the 'rivate

sector to build develo' and etend a''lications of the N//

and that "overnment action should com'lement 'rivate sector

behavior and not com'ete !ith it%13

1. ancey @illiam % itchell Dre"ory @% and $i'' (ana E%

MElectronic Commerce 6nares 6ellers in ultistate &a @ebM ori"inally

'ublished in M73 >ractical &a 6trate"ies 270M /A Drou' .999

12 /nformation /nfrastructure &asJ orce M&he National /nformation

/nfrastructure /nitiativeB A"enda for ActionM ,6e't .5 .993-13 6amuelson >aul and arian Hal % M&he XNe! EconomyX and

/nformation &echnolo"y >olicyM 200.

- 59 -



As America and the rest of the !orld became increasin"ly

familiar !ith the commercial 'ossibilities of the internet

the internet flourished and a lot of venture ca'ital

s'endin" !as tar"eted at the information technolo"y sector%

/t !as in res'onse to this "ro!th that the "overnment Jne!

it had to quicJly im'lement effective 'olicy that !as u' to

date%

/n .998 the federal "overnment of America enacted the

)ederal /nternet &a reedom Act* ,/&A- that !ould last

from .0..998 to .02.200.%14 &he /&A im'osed a 3+year

moratorium on state and local taes on internet access and

E+commerce unless the ta !as im'osed and enforced before

October .998% /t also a''lies to multi'le and

discriminatory taes on E+commerce ,i%e% no ne( taes-%

&his Act created !ith it an Advisory Commission on

Electronic Commerce ,ACEC- !hich !as meant to taJe an in

de'th looJ at the surroundin" issues of E+commerce and

'rovide s'ecific solutions%

(iscriminatory taes refer to the neutrality 'rinci'le of

taation and are a''lied on the basis of an established

neus in a "iven re"ion% &he 'ur'ose of the /&A !as to

eclude the internet access 'oint as a 'ossible neus% or

eam'le su''ose someone 'urchased a "ood online !hile in

Ne! orJ thou"h they live in Ne! En"land from a vendor in

Colorado and sent this "ood to a relative in Houston% &his

could lead to some very com'licated ta issues Gsuch as

those of Iurisdiction and establishin" neus% And thus

14 Nellen Annette <E+commerce B &o &a or Not to &a Q &hat is the

Puestion V Or is it Q= 6an Kose 6tate University 200.

- 60 -



multi'le taes refer to different states tain" the same

transaction%

&he 'ur'ose of the /&A !as to try not to stifle a "ro!in"

marJet se"ment of the economy by avoidin" multi'le taation

of these enter'rises and 'reventin" Iurisdictions from

im'osin" such taes until a 'ro'er frame!orJ had been dra!n

u' in !hich the taes could be levied 'ro'erly% On November

28200. Con"ress and the >resident etended the

moratorium till November .2003% &his etension !as called

the /nternet &a Nondiscrimination Act ,/&NA-% California

etended its o!n version of the /&NA CA+/&NA till Kanuary

. 2004%

&he Advisory Commission on Electronic Commerce ,ACEC- first

met in Kune .999 and consisted of a 'anel of .9 members

!ho !ere to try and outline a ta 'roIect for Con"ress% &he

'anel consisted of "overnors anti+ta advocates and many

senior ranJin" officials from the cor'orate sector from

com'anies such as A&R& &ime @arner and Charles 6ch!ab%

At this meetin" the 'arties dre! u' a list of .8 criteria

for the a''lication of taes on E+commerce% &hese criteria

ho!ever !ere more "uidelines that !ould be used to

critique their final 'ro'osal rather than actual 'olicy

recommendations on issues such as neus and source+based

taation% 6ome of their questions included

<.1% Ho! does this 'ro'osal treat local "overnments*autonomy and their ability to raise a "reater orlesser amount of revenues de'endin" on the needs anddesires of their citiLensQ

- 61 -



.8% /s the 'ro'osal constitutionalQ=15

&he Committee !as required to reach a minimum of a t!o+

thirds maIority on all criteria listed% As of arch 2000

the ACEC met a"ain in (allas &W !ere there !as a fallin"

out bet!een the business and "overnment members on four

issues u'held by the business members% Conclusively they

!ere not able to set their differences aside and the

collusive effort fell a'art and even three "overnors

!ithheld their vote on the final 'ro'osal% &his !as due to

conflictin" interests that the different 'arties brou"ht to

the table that could not be resolved by the 'anel% /n A'ril

2000ho!ever the ACEC 'resented their re'ort to con"ress%

&heir su""estions are outlined belo! B17

• or a 'eriod of 5 years etend the moratorium on E+

commerce ta collections%

• aJe 'ermanent the current moratorium on any

transaction taes on the sale of /nternet access

includin" taes that !ere "randfathered under the

/nternet &a reedom Act%

• Eliminate the 3 federal ecise ta on communications

services%

• Eliminate the ecess ta burdens on telecommunications

real tan"ible and intan"ible 'ro'erty%

• Etend the eem'tion of certain ty'es of business

equi'ment from sales and use taes to

telecommunications infrastructure

15 AC+EC M/nvitation for >ro'osalsM Thtt'B!!!%E+

commercecommission%or"invite%htm $ast vie!ed successfully on Kune20th 200417 Advisory Committee on Electronic Commerce Me'ort to Con"ressM

Available at htt'B!!!%E+commercecommission%or"acecYre'ort%'df A'ril2000

- 62 -



• eco"niLe the OEC(*s leadershi' role and its

'rinci'les of frame!orJ for E+commerce taation i%e%

no ne! taes shall be a''lied: only eistin" taes

shall be a''lied% All nations should be encoura"ed to

!orJ to"ether and thinJ throu"h all ne! ta 'olicies

'ut into 'lace% &he )5 canons of taation* should be

adhered to%

Of the 'ro'osed ideas only ne !as a"reed u'on by the

maIority and that !as !ith re"ards to understandin" that

free trade is of fundamental im'ortance to the "ro!th of

the U6 economy and that efforts should be made by the

administration to su''ress all tariffs on the internet%

A "rou' of 34 states decided to !orJ collectively in an

effort to solve the internet ta riddle%11 &hese states

!orJed to"ether to form the streamlined sales ta 'roIect

,66&> henceforth-% &he 'ur'ose of 66&> !as to form uniform

definitions of ta bases !hat "oods are to be ecluded

from taation ,eam'les are in &able 4- 'rovide for

centraliLed ta administrations 'rovide uniform sourcin"

rules 'rovide for online+sales and use re"istration

'rovide one rate 'er Iurisdiction 'rovide sim'lified

eem'tion 'rocedures and 'rovide sim'lified ta filin" and

remittance 'rocedures%18 Althou"h addressin" E+commerce

issues has been a concern of 66&> it is attem'tin" to

address those concerns as !ell as those of )ain 6treet*

vendors% &his !as done by tryin" to reduce the burden that

11 einschrieber obert and ?ent ar"aret <Understandin" the

6treamlined 6ales and Use &a A"reement= Cor'orate #usiness &aationonthly >a"e . Kanuary 200318 66&> <6ourcin" /ssue >a'er= >a"e 3 Kanuary 2002

- 63 -



many of these states are offerin" a collection allo!ance: a

small 'ercenta"e of the sales ta collected%8.

Under section 3.0 of 66&A the basic sourcin" 'rinci'le is

to ta on a destination basis%82 A destination source

'rinci'le !ould then 'lace the burden of collectin" the ta

on the buyer% &he rationale for this decision says 66&>

that this reduces com'lications for the seller to Jno! the

correct ta+rate for the destination it is sellin" to% &his

also ne"ates the establishment of a minimum sales threshold

from a seller in order for it to start remittin" use taes

to the destination state% urthermore it is an almost

universal 'ractice of states in the U%6% and countries as

!ell that they do not im'ose local sales taes nor use

taes on merchandise bound to destinations outside its

borders%83 &his leaves the o''ortunity for the state to ta

in+bound "oods !hich some may ar"ue it ri"htly has the

Iustification to do so as those "oods are for use !ithin

their boundaries% Ho!ever this does not a''ear to be fair

to sellers !ithin a states* Iurisdiction that are sellin"

similar same or substitutes of !hat another retailer

sells to out of state buyers% $astly this destination

based sourcin" 'rinci'le !hen contrasted !ith ori"in based

sourcin" does not affect the decision of firms* location

choices% An earlier ar"ument mentioned that such a solution

may lead to states com'etin" !ith one another to

accommodate lar"er sellers for ta revenues%

8. ulti+state &a Commission ,&C- <>ublic+>rivate 6ector 6tudy of

Cost of Collectin" 6tate and $ocal 6ales and Use &aes= >a"e . 200382 66&> <6ourcin" /ssue >a'er= >a"e . Kanuary 2002

83 (ue Kohn and iJesell Kohn <6ales &aation B 6tate and $ocal

6tructure and Administration= .994

- 65 -



@hat*s most interestin" about section 30. is its very

!ordin" B

<&hese 'rovisions a''ly re"ardless of the

characteriLation of a 'roduct as tan"ible 'ersonal'ro'erty a di"ital "ood or a service ,ecludin" for the'resent telecommunications-=

41 ,>a"e .7-

6uch 'hrasin" contributes to the lon"evity of the 66&A by

not distin"uishin" bet!een the ty'e of "ood or service

'rovided and leavin" o'en room for inter'retation by ta

Iurisdictions to a''ly their o!n% &his also leaves room for

inter'retation as ne! technolo"ies emer"e% Under the 66&A

the only time that ori"in+based taation is used is !hen

the 'roduct is received by the buyer at a business location

of the seller% &he 66&A has not been im'lemented%

- 66 -



./ 1 A8$tra%#a

Australia is the last of the countries under eamination%

/t has been included in this study 'rimarily due to its

"eo"ra'hic location !hich has much to do !ith !hat

treaties it for"es !ith its nei"hbors and may also be

related to the overall 'rofitability of its E+commerce

"oods marJet% Althou"h Australia is not considered a Jey+

'layer in E+commerce it is ho!ever one of the more

develo'ed countries in the !orld and because it is in such

a remote corner of the !orld its E+commerce 'olicies are

"oin" to be that more of interest%

&he common!ealth "overnment identified E+commerce as one of

its .0 'riorities !ith re"ards to the future of the

information a"e and Australia s'ecifically outlined in <A

strate"ic rame!orJ for the /nformation Economy

/dentifyin" >riorities for Action=+Kanuary .999%

Australia has commissioned to date 2 maIor studies that

outline the ste's taJen by the Australian &a Office ,A&O-

to analyLe and im'lement E+commerce le"islature , <&a and

the /nternet= .991 <&a and the /nternetB 6econd >a'er=

.999-%

&he Attorney Deneral has led the !ay by commissionin" a fe!

re'orts that !hen cou'led to"ether made the le"islation

uniform 'recise and im'lemented quicJly% &he Electronic

Commerce E'ert Drou' !as formed by the Attorney Deneral of

Australia and in A'ril of .998 they re'orted their

findin"s% (urin" this 'eriod of time ,.991 to 'resent-

Australia has for"ed many relations !ith countries in ho'es

of creatin" collaboration all around% &hese countries

- 67 -



include Canada United 6tates /ndia and &hailand% As !e

are mostly used to seein" %com*s and %or"*s and not too

many %au*s &able 5 sho!s the activity level of businesses

in Australia%

Ori"inally Australia !as !orJin" hand in hand !ith the

United Nations Commission on /nternational $a! ,UNC/&A$-

!ith its 'olicy develo'ment% ost 'robably the reasonin"

for this could be because many of its 'revious enactments

!ere derived from that body of thou"ht% Australian

liti"ation could have been amended sli"htly to include the

electronic equivalent of transactions% &he .991 re'ort

'rovides evidence of this%

After havin" issued the first study the re'ort

hi"hli"htin" more concerns and issues that E+commerce

faced mostly dealin" !ith the fact that the technical

nature made it difficult to monitor and even find the

source country of certain merchants%

&his findin" 'ursued !ith studies and meetin"s as attem'ts

!ere made to use electronic si"natures as the mode of

tracJin" transactions and also decide on !hat

res'onsibilities !ere included on behalf of the merchant

and the 'urchaser% &his also 'roved to be a tedious tasJ

and the Australian &a Office turned to the OEC( to looJ

for "uidance% At the same time it !as decided to reform

all ta 'olicy relatin" to business% Cou'led !ith this it

!as believed that their ta la!s !ould be more in line !ith

the rest of the !orld and they !ould follo! OEC(

directives on E+commerce as soon as collusion !as reached%

- 68 -



Australian la! im'oses income ta on com'anies that are

o'eratin" !ithin the country and are tradin" at a 'rofit%

&he Iurisdiction that the firm falls under de'ends

naturally on their 'hysical location% @ith re"ards to E+

commerce Australian courts !ill focus on !here the sellin"

activities taJe 'lace and thus since the location of the

server is !here the transaction actually taJes 'lace if it

ha''ens to fall under Australian Iurisdiction income

derived from that source !ill be taed accordin"ly%

@ith re"ards to Australian la! and mail+catalo"ue orders

,sourcedestination issues- the case of relevance is

<Entores $td% s iles ar East Cor' G.955 2P# 321=%

)Acce'tance* ,!hereby the transaction is concluded the

seller accepts 'ayment from the buyer in echan"e for

"oods- is deemed to taJe 'lace at the time and 'lace !here

the notification of buyers* intent is received thus

deemin" the 'arty liable for taable income !here

acce'tance occurs% &hereby becomin" another reasonable

definition for a )>ermanent Establishment* ,>E- because the

contract of sale is also done usin" the !eb+server and is

thus considered the source of the 'rofit derived from the

sale%

Australian (&A la!s do not allo! the taation of 'rofits of

businesses sellin" "oods to residents from outside of the

country% Under current la!s even if a business maintains

!arehousin" facilities !ithin the country to trans'ort

"oods to residents this does not fall under the definition

of a >E and thus 'rofits are not taable% &his is

currently under revie! ho!ever%

- 69 -



9 1 Cn"%8$#n

/t is evident from the time and money s'ent by "overnments

that they realiLe the im'ortance of E+commerce as u'comin"

industry !ith "reat "ro!th 'otential% &he debate on !hether

to ta E+commerce has not remained a debate anymore% 6tates

are !illin" to "o ahead and 'lace the 'ro'er le"al

environment required to harness the technolo"y before there

is an even "reater la" bet!een le"al res'onse and social

'henomenon%

&he "eneral theme has been that E+commerce is considered a

technolo"y !ith 'otential and should not be stifled%

Equally so they believe that it should not be left

unattended at the loss of the local ta offices and

merchants% &he economic and thus 'olitical collaboration

amon"st nations to try and miti"ate conflictin" a"endas is

)buildin" brid"es* bet!een countries all attem'tin" to

reach a common conclusion%

6ome "overnments are taJin" this o''ortunity to rehash and

u'date eistin" ta 'olicies% Others have tried to e'loit

the technolo"y by develo'in" online systems for collectin"

taes and maJin" current ta information available%

&he economic 'rinci'les Gsim'licity neutrality equity and

efficiency that are meant to "uide the formation of ta

'olicy have not come to com'lete fruition in any of the

case studies% 6ome frame!orJs are lacJin" one or more of

the canons of taation% &he reasons for this may be one of

many%

- 70 -



Countries have focused more immediately on the ty'es of

technolo"ies and issues that they see relevant to their o!n

societies% or eam'le ho! the U%6% has focused on cross+

border transactions !hile /ndia more to!ards develo'in"

'olicy for di"ital transactions% &he resultin" 'olicies

have thus taJen on this role and direction accordin" to the

'erceived 'roblems !ithin their state boundaries%

/nternational coo'eration then serves as a means to further

this a"enda% Countries of similar circumstance band

to"ether and maJe alliances to mutually benefit one

another%

/ndian studies in 'articular have suffered due to lacJ of

available information% /nformation on ta base erosion or

cross+border activity !as unavailable% /ndia has raised

more concerns about revenue sharin" than any other country%

&his may be because it is a relatively 'oorer country than

the rest but the reasonin" "iven is that of equitable ta

sharin"% Ho!ever their 'olicy has sho!n to be 'rotective

of their local marJets much to the disa''ointment of other

countries%

/n the end the country that raised the most concern about

the issue and conducted the most studies has 'roduced the

least amount of results% &he situation in the United 6tates

has not chan"ed much at all ece't that most merchants are

no! su''osed to collect sales taes for sales !ithin their

states and remit income taes as !ell to local

authorities% &here is still no com'rehensive mechanism in

the U%6% to collect use taes% &his is in 'art due to all

the different tain" Iurisdictions in the U%6% and the N6&

ta system there does not allo! for as strin"ent monitorin"

- 71 -



and coo'eration as does the A& system% ean!hile all

other countries in the study that did have A& ta

systems have com'leted their ta reforms for E+commerce%

arian ,2000- mentions that 'olitical "oals tend to 'lay

more of a role than economic ones in 'roducin" 'olicy% &his

is 'erha's the reason !hy attem'ts at harmoniLation have

failed% &hat is after all the Jey economic 'rinci'le that

!ould a''ease the ta avoidance 'roblem%

Diven that each of the countries Gor union studied in this

'a'er have 're+eistin" le"al and taation traditions it

is natural that the 'olicies 'roduced !ould follo! in that

same frame!orJ% Hence findin" another reason !hy a

com'rehensive solution to the 'roblem may not be 'ossible%

inally it !as the countries that had ta systems based on

sound economic 'rinci'les that !ere able to res'ond fastest

to this issue% /t came do!n to a matter of com'atibility of

the old !ith the ne!%

- 72 -



; 1 B#%#5rap+'

.- AC+ECM/nvitation for >ro'osalsM

Thtt'B!!!%ecommercecommission%or"invite%htm $ast

vie!ed successfully on Kune 20th 2004

2- AC/ <6tate and $ocal &aation of Out+Of+6tate ail

Order 6ales= A'ril .987

3- Advisory Committee on Electronic Commerce Me'ort to

Con"ressM Available at

htt'B!!!%ecommercecommission%or"acecYre'ort%'df A'ril

2000

4-

Anderson 6arah% <E+commerce Eludes the &a an+ theclicJ+and+mortar artificial advanta"e in the ne!

Economy= Cor'orate Ca'ture of the /nternet ol% 23

No% 3 arch 2002

5- Andrus Kose'h and errill >eter <EB E>O& O H/DH

>O@EE( CO/&&EE ON E$EC&ON/C COECE AN( &AWA&/ON=

>rice@aterhouseCoo'ers #oston 200.

7- Aqute esearch ay 2003%

1-

Auerbach Alan K% M&aation and Economic EfficiencyM

University of California #erJeley 200.

8- #icJley Kames % <A alue+Added &a Contrasted @ith

National 6ales &a= Con"ressional esearch 6ervice &he

$ibrary of Con"ress Dovernment and inance (ivision

6e'tember 2004

9- #oston Consultin" Drou' and 6ho'%or" <&he 6tate of

Online etailin"= November .998.0- #ruce (onald o@illiam and urray atthe! M&o

&a Or Not &o &a Q &he Case of Electronic CommerceM

Contem'orary Economic >olicy ol% 2. /ssue . '25

Kan2003

- 73 -



..- #ruce (onald and o @illiam % <6tate and $ocal

6ales &a evenue $osses from E+commerceB Estimates of

Kuly 2004 &he University of &ennessee Center for

#usiness and Economic esearch Kuly 2004

.2- Ca'tain >hili''e <?no!led"e ana"ement Overvie!= @HO

November 200.

.3- Coady (avid and (reLe Kean <Commodity &aation and

6ocial @elfare B &he Deneralised amsey ule=

/nternational &a and >ublic inance ol 9 /ssue 3 ay

2002

.4- C6C and 6UN /CO66&E6 <NE& #U6/NE66 6O$U&/ON #/ND6

&HE O&UNE .500 /N&O &HE NE& ECONO= 200.

.5- (ennis 6ylvia MKust 5 >ercent Of @orld OnlineM(ecember

.. 2000 T

htt'B!!!%com'uteruser%comne!s00.2..ne!s.5%html

$ast ie!ed B Kuly 29th 2004

.7- (ne!s%com E+commerce ta bill #efore house

6e'tember 2003 +

htt'B!!!%nacsonline%comNAC6Dovernment@ashin"tone'or

tArchivesnd0929032%htm

.1- (ue Kohn and iJesell Kohn <6ales &aation B 6tate and

$ocal 6tructure and Administration= .994

.8- (u""al >avan M&elecommunications Conver"ence $a!s in

/ndia A critique = urdoch University Electronic

Kournal of $a! ol 9 Number . arch 2002

.9- Euro'ean Commission 6tudy on (irective 2. November

2003

20- Euro'ean Union Commission M/N&E/ EA$UA&/ON E>O& ON

&HE /6CA$/6 >ODAE .998+.999M 2002

2.- Euro'ean Union Commission ME+commerce and indirect

taationM .998

- 74 -



22- Euro'ean Union Commission M>ro'osal for a EDU$A&/ON O

&HE EUO>EAN >A$/AEN& AN( O &HE COUNC/$B amendin"

e"ulation ,EEC- No 2.892 on administrative co+o'eration

in the field of indirect taation ,A&-M 2000

23- einschrieber obert and ?ent ar"aret

<Understandin" the 6treamlined 6ales and Use &a

A"reement= Cor'orate #usiness &aation onthly Kanuary

2003

24- orst (avid $% <&he Continuin" itality of 6ource+

#ased &aation in the Electronic A"e= &a Notes

/nternational .991

25-

Doolsbee Austan and SittrainKonathan <Evaluatin" the

Costs and #enefits of &ain" /nternet Commerce= ay 20

.999%

27- DrovesHarold <&a >hiloso'hers= >a"e .. &he

University of @isconson >ress .914

21- Duerriero ichael K% <@hatXs Net%%%or Neus /n 6tate

And $ocal &a= etro'olitan Cor'orate Counsel ma"aLine

6e't 2003

28- /nformation /nfrastructure &asJ orce M&he National

/nformation /nfrastructure /nitiativeB A"enda for

ActionM ,6e't .5 .993-

29- /&E> <&a >rinci'les B #uildin" blocJs of a sound ta

system= >a"e . 2004

30- Kohnson >eter A% <A Current Calculation of Uncollected

6ales &aes isin" from /nternet Dro!th= >a"e 5 (irect

arJetin" Association arch 2003

3.- Koint enture &a >olicy Drou' M6ummary of A''roaches

or A''lyin" 6ales and Use &aes to E+commerce= 6ilicon

alley Net!orJ 2000

32- $undy ?athleen >% M&he &aation of E+commerceB &he

/na''licability of >hysical >resence Necessitates an

- 75 -



Economic >resence 6tandardM &he ichmond Kournal of $a!

and &echnolo"y olume /// /ssue 2all 200.

33- artie Charles @% M/ssues in Use &a AdministrationB

/ncreasin" the Com'liance ateM in MCollectin" &aes in

the Cybera"eM.999%

34- clure Charles E% M&aation of Electronic Commerce in

the Euro'ean Union= 2002

35- esenbour" &homas $% <easurin" Electronic #usiness=

>a"e 4% U%6 #ureau of Census Au"ust 200.

37- orin %A% and 6uareL % MisJ Aversion evisitedM

Kournal of inance6e'tember .20.+.2.7 .983

31-

ulti+state &a Commission ,&C- <>ublic+>rivate

6ector 6tudy of Cost of Collectin" 6tate and $ocal 6ales

and Use &aes= 2003

38- NA&/ONA$ DEODA>H/C v% CA$% EPUA$/SA&/ON #(% 430 U%6%

55. ,.911- 430 U%6% 55.

39- Neill Kon %M&he benefit and sacrifice 'rinci'les of

taationB A synthesisM 6ocial Choice R @elfare 2000

ol% .1 /ssue . '..1

40- Nellen Annette ME+commerce B &o &a or Not to &a Q

&hat is the Puestion V Or is it Q= 6an Kose 6tate

University 200.

4.- OEC( <E+Commerce &a B A sober vie! of Cybers'ace=

(avid Holmes 2002: <A borderless @orldB ealisin" the

'otential of "lobal Electronic Commerce= OEC( .998 :

<&he Economic and 6ocial /m'act of Electronic Commerce=

OEC( .999

42- OEC( </m'lementin" &he Otta!a &aation rame!orJ

Challen"e= ,#reifin"- Committee of iscal Affairs 2000

43- OEC( Committee on iscal Affairs MC$A//CA&/ON ON &HE

A>>$/CA&/ON O &HE>EANEN& E6&A#$/6HEN& (E/N/&/ON /N

- 76 -



E+COECEBCHANDE6 &O &HE COEN&A ON &HE O(E$&AW

CONEN&/ON ON A&/C$E 5M OEC( (ecember 2000

44- OEC( E+commerce >olicy #rief 200.

45- >om' ichard (% <(eterminin" the boundaries of a 'ost+

#ellas Hess @orld= National &a Kournal ol% 44 /ssue

2 '231 Kune .99.

47- PlinJs%net + <Koint E%U%+U%6% 6tatement on electronic

commerce= Thtt'B!!!%qlinJs%netcomdocseu+us%htm $ast

ie!ed 6uccessfully on (ec% 3rd 2004

41- e'ort of the Hi"h >o!ered Committee on E+commerce and

&aation ++ (ecember .7 2000

48-

osen (ahlbyand 6mith #oone M>ublic inance in

CanadaM 2nd Canadian Ed% cDra!+Hill yerson 2003

49- osen Harvey 6 MAN A>>OACH &O &HE 6&U( O /NCOE

U&/$/& AN( HO/SON&A$ EPU/&M Puarterly Kournal of

Economics ay18 ol% 92 /ssue 2 '301

50- 6alJever Ale% MHo! AmaLon O'ens U' and Cleans U'=

#usiness @eeJ a"aLine Kune 2003

5.- 6amuelson >aul and arian Hal % M&he XNe! EconomyX

and /nformation &echnolo"y >olicyM 200.

52- 6cudder Keffrey A% <E+Commerce B Choosin" the

A''ro'riate &a odel= aIor &hemes in Economics 2003

53- 6harma (inesh C% M6tudy finds "a's in di"ital divide

theoryM October 29 2003 T htt'Bmsn%com%com2.00+

..04Y2+5098184%htmlQ'artZmsn $ast ie!ed B Kuly 29th

2004

54-

6ilas ason Co% v% &a Commission of 6tate of

@ashin"ton 302 U%6% .87 58 6%Ct% 233 ,.931-

55- 6in"h NirviJar </N(/A*6 /NOA&/ON &ECHNO$OD 6EC&OB

@HA& CON&/#U&/ON &O #OA(E ECONO/C (EE$O>EN&Q=

OEC( arch 2003

- 77 -



57- 6inn H%@ <&a HarmoniLation and ta com'etition in

Euro'e%= Euro'ean Economic evie! 34 489+504 .990

51- 6mith Adam <An /nquiry into the Nature and Causes of

the @ealth of Nations /ndiana'olisB $iberty Classics=

olume // .98. ''% 825 +828%

58- 66&> <6ourcin" /ssue >a'er= Kanuary 2002

59- 66&> <ates and #oundary (atabases /nstructional >a'er=

ay 2004

70- 6tream$ined 6ales+&a >roIect M6ourcin" /ssue >a'er=

66&> >a"e . Kanuary 2002

7.- 6u'reme Court of the United 6tates 410 N%@% 2d 203 208

,.99.-

72- &echnical Advisory Drou' on &reaty Characterisation of

Electronic Commerce >aymentsM&AW &EA& CHAAC&E/6A&/ON

/66UE6 A/6/ND O E+COECEM ebruary 200. OEC(

73- &roy iJe <PU/$$ >UCHA6E D/E6 6&A>$E6 E+>E6ENCE=

(iscount 6tore Ne!s ol% 31 /ssue 8 .998

74- arian Hal <&aation of Electronic Commerce=

University of California at #erJeley A'ril 2000

75- @aman Henry A% and &urner Kim% </nformation on

ederal Contractors &hat Are /ncor'orated Offshore=

United 6tates Deneral Accountin" Office October . 2002

77- ancey @illiam % and itchell Dre"ory @% and $i''

(ana E% MElectronic Commerce 6nares 6ellers in

ultistate &a @eb M ori"inally 'ublished in M73

>ractical &a 6trate"ies 270M /A Drou' .999

- 78 -



* 1 APPEN D IX

U /S/ S+#pm ent$) Sa%e$) Re&en8e$ an? E-"m m er"e : ,0 1 ,,=<a%8e$ are #n B#%%#n$ ! D %%ar$

<a%8e ! S+#pm ent$) Sa%e$ r Re&en8e

,0 ,,YY Per"ent C+an5e

Per"entD #$tr#8t#n !

E-"m m er"eD e$"r#pt#n

Tta% E-"m m er"e Tta% E-"m m er"e Tta%E-"m m er"e

,0 ,

Tta% 0).;, 0)99 0)9.; 0)9, -/9 / 0 0

B8$#ne$$ tB8$#ne$$

9)9;9 33. 9)3. 33; -2/3 -/, 32/2 32/3

anufacturin" 391. 125 4209 157 +5%1 +4%. 78%0 1.%2

erchant@holesale

2105 210 214. 24. +.%3 .2%0 25%3 22%1

B8$#ne$$ tCn$8m er

;)*39 ;0 ;);; 9. ,/. 3/, 9/; 9/0

etail 3.4. 34 3059 28 2%1 22%. 3%2 2%7

6elected6ervices

4155 31 4748 31 2%3 +.%4 3%5 3%5

&A#$E .

200. E+commerce ulti+6ector e'ort ,E+stats- Economics and 6tatistics Administration

U%6% Census #ureau arch 2003

- 79 -



C8ntr' rRe5#n

InternetU$er$)Late$t Data

Pp8%at#n, E$t/

InternetPenetrat#n

S8r"e an? D ate! Late$t Data

!U $er$

0 U n#te? State$ ,2),;0)0*; 294540.00 79%0 NielsenNKune04

25%7

, C+#na *;)).321%917%2217%7 CNN/C (ec03 .0%9

2 apan 9.)322)0 .21944200 5.%5 NielsenNKune04

8%3

G erm an' .)2.;)93 82733200 54%9 NielsenNKune04

5%1

. U n#te? #n5?m 2.)*20)09 59.51400 70%7 NielsenNKune04

4%5

9 rea S8t+ ,3),,) 41.35500 72%0 ?N/C (ec03 3%1

; Ita%' ,*)90) 57.53100 50%9 C%/%Almanac (ec033%7

* Fran"e ,2),09)030 59494800 39%0 NielsenNKune04

2%9

3 Cana?a ,).)32027700 73%9 C%/%Almanac (ec032%7

0 Bra#% 03);9)3; .83.99700 .0%8 NielsenNKune04

2%5

00 In?#a 0*)*0) .088057200.%1 /&U (ec03 2%3

0, Spa#n 0).),*3 4.895700 34%5 NielsenNKune04

.%8

02 A8$tra%#a 02).92)., 20227.00 71%. NielsenN A'r04.%1

&A#$E 2

</nternet Users &o' 20 Countries /nternet Usa"e= &nternet * orld +tats, sage andPopulation +tatistics% Au"ust .

st 2004 T htt'B!!!%internet!orldstats%comto'20%htm

- 80 -



&his table 'rovides a systematic

breaJdo!n of some of the most im'ortant

E+commerce issues and the commentary

e'lains !hat Jind of effect they !ould

have on the over all solution% &he final 'ro'osal is the

one !ith the most 'ositive and least ne"ative effects%

TABLE 2

Criteria

A''roach

6im'lifies

com'liance over

multi'le

Kurisdictions

>rovides an

effective

mechanism for

collection of

taes from

remote

vendors

>rovides

consistent

a''lication

of sales

and use

taes for

all ty'es

of commerce

Allo!s

state and

local

"overnments

to set

their o!n

ta system

(oes not

discriminate

a"ainst any

ty'e of

commerce%

A% Allo! the /&A

moratorium to e'ire

in October 200.

O O O [ [

Allo!in" the moratorium to e'ire !ill not remedy issues of com'leity faced by multistate businesses in

dealin" !ith multi'le Iurisdictions or hel' state and local "overnments collect sales and use taes on sales

by remote vendors% #y lettin" the moratorium e'ire it !ould have served its 'ur'ose of a tem'orary ban on

certain taes so as not to im'ede the "ro!th of E+commerce% Ho!ever in the case of the united states it is

not the moratorium that is sto''in" Iurisdictions from collectin" use taes it is the uillcase%

#% Etend the

Current ederal

moratorium on ne!

taes 'ermanently%

O O O + +

Kust etendin" the current moratorium alone !ill not allo! state ta officials to deal !ith the com'leities

of multistate ta riddles% &he moratorium itself a''lies to very fe! states mostly because those states have

found !ays around uillor le"islation that is different from those results ,California is an eam'le-%

C% $e"islatively

define neus at the

federal level for

sales and use ta

'ur'oses%

[ + [ O [

&his 'ro'osal has the 'otential of 'rovidin" "reater certainty as to !hen a business

has a taable 'resence% 6tate and "overnment officials !ill still have to deal !ith

collectin" the taes% All ty'es of vendors !ould be subIect to the same rules ho!ever

states !ould still be able to set their o!n ta rates and ta base%

(% Allo! states to + O [ [ [

+ Has a positive impact in meetingthis citeia- Has a negative impact in meetingthis citeia

! Does not signi"icant#$ a""ect thisciteia in eithe %a$.

- 81 -



collect sales and

use from remote

vendors% ,overturn

Puill-

#ecause there are over 7000 ta Iurisdictions in the united states and each one able

to im'ose its o!n sales and use taes this !ould not maJe thin"s any sim'ler for

businesses% &his reversal of uill!ould level the 'layin" "round bet!een the

traditional retailers and remote vendors and thus reduces discrimination a"ainst any

ty'e of commerce% Consumers !ould most liJely need to be educated about the use ta for

this to !orJ% eversal of Puill !ould still not 'rovide a mechanism for states to

collect taes ho!ever it is estimated that from mail catalo"ues alone F3 #illion in

taes is lost annually% @ith the "ro!th of E+commerce this number is e'ected to rise%

E% Have a third

'arty serve as a

collector of sales

and use taes%

[ O [ O [

&his method sim'lifies thin"s "reatly for businesses because they only have to deal

!ith one or"aniLation% Ho!ever if 'artici'ation of the states and vendors !as

voluntary this could become a 'roblem for businesses% Assumin" that all of them do

'artici'ate sales and use taes !ould be a''lied consistently to all ty'es of

commerce% &he 'roblem still remains that !ho !ould 'ay the administrative fees of such

a system%

% Eem't all or a

'ortion of E+

commerce from sales

and use taation%

O O + + +

#y eem'tin" certain ty'es of E+commerce from taation and not others this !ould

discriminate a"ainst certain ty'es of commerce and E+commerce% &his violates the

neutrality 'rinci'le of taation because the non+eistence of taes on certain "oods

effects the consumers 'urchase decision% &his !ould also taJe a!ay from the autonomy of

state "overnments over their ta la!s% &his could also be abused by local merchants

!here orders could be 'laced on com'uters ,internet- in the store to be eem't from

sales ta%

D% Create ederal

level ta for remote

E+commerce and mail

order sales

O O [ + [

&his !ould a''ly only to remote sellers and not to local merchants% Ho!ever the

overall results ,difference in ta levels- is ambi"uous but at least all levels of

,e-commerce !ould be subIect to taation% &his o'tion !ill also taJe a!ay from the

autonomy of state+level ta administration% &his could also effect the neutrality

- 82 -



that !ould be needed to achieve sim'licity for vendors and ta'ayers%

&A#$E 3

State Ta4 E4em pt#n State Ta4 E4em pt#n

innesota

6olid !aste mana"ementservices taes

ur clothin" ecise taes

Ohio

$ocal hotel lod"in"taesesort area "rossrecei'ts ta

NebrasJa$od"in" taes

Automobile rental com'anytaes

@ashin"ton(C

Utilities andtelecommunications"ross recei'ts ta

Nevada

oom taes

&ourism taes

&elecommunications taes

hode /sland

>arJin" surchar"e

Hard to dis'ose ta#evera"e containerta

&able 4

66&> <&aes Affected by 66&> Act and A"reement= arch 2002

/&R& U6ADE ACO66 A/OU6 /N(U6& 6EC&O6

/N(U6&NU#E O#U6/NE66E6

,000s-

#U6/NE66E6U6/ND

CO>U&E6,-

#U6/NE66E6@/&H /N&ENE&

ACCE66 ,-

#U6/NE66E6 @/&H@E# >E6ENCE ,-

Electricity "asand !ater su''ly

+ 95 89 44

>ro'ery and#usiness6ervices

.74 97 85 25

inance and/nsurance

27 90 8. 22

@holesale &rade 48 89 11 33

etail &rade ..9 18 51 22

taxing cyberspace : economic application and cross-country policy analysis

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