Introduction to E-Commerce Law

Module 6 - E-Commerce Taxation

NARRATIVE

ASSIGNMENTS

SUPPLEMENTAL DOCUMENTS

IBLS ARTICLES

NARRATIVE

The Internet Tax Non-Discrimination Act has extended the U.S. tax moratorium on Internet taxation, originally passed at the Internet Tax Freedom Act, until November 2003. This should be a drop dead sunset act on Internet tax moratoria since a number of initiatives are close on the heels of the 2003 date.

In the United States the National Governors Association is diligently working toward a model act that would ameliorate the objections that have been voiced by Congress and the United States Supreme Court.

For their part, the Congress will be poised to preempt state taxation in the area of electronic commerce. The cross-border sales transactions have reached a tipping point at which states will begin to lose significant tax revenues due to remote purchasing habits of a new generation of consumers if a tax structure is not worked out. The federal government would have to step in and impose a sales tax administration that would be in addition to the income tax structure that it already maintains.

For its part, the United States Supreme Court has observed the effects of attempting to impose a tax recording, collection, and remittance system on interstate commerce. In the1992 case of Quill v. North Dakota the state of North Dakota attempted to collect sales tax from an out-of-state mail-order retailer. The court held that the retailer did not need to have the physical presence in the state to allow the state to impose a tax on transactions with its in-state customers. Second, the court abrogated the nexus argument under the due process and commerce clauses, overturning the National Bellas Hess case of 1967. In Quill, the court recognized that the retailer had “purposefully directed its activities at North Dakota residents, that the magnitude of those contacts is more than sufficient for the due process purposes, and that the use tax is related to the benefits Quill receives from access to the State.” At page 308.

The court’s analysis of the Commerce Clause reached back to 1888 with its prohibition that “no State has the right to lay a tax on interstate commerce in any form”, which morphed into the “Multiple-taxation doctrine” and then found its way to the Complete Auto test.

The Complete Auto doctrine is most cogently stated in the D.H. Homes Co. case of 1988. Under our current Commerce Clause jurisprudence, "with certain restrictions, interstate commerce may be required to pay its fair share of state taxes." However, there still is a significant burden on interstate commerce where remote retailers would have to create systems for tracking customers, collecting sales and use tax from over 7,500 taxing jurisdictions, and remit the funds appropriately. The battle has been joined. What will happen when the dust settles on this fight will cause a worldwide revolution in electronic commerce.

The European Parliament and the Organization for Economic Co-Operation and Development (OECD) Committee on Fiscal Affairs have each proposed tax policies on Internet commerce.

The development of electronic commerce in the 1990s posed a number of taxation questions for all governments. The OECD, with its long history of developing practical solutions to international tax issues, reacted quickly and by 1998 had agreed the Ottawa Taxation Framework Conditions. These set out a number of principles that governments should adopt in their approach to taxation of the emerging sector. Since 1998 the work of the OECD’s Committee on Fiscal Affairs has continued to develop these principles into practical guidance for international application. In particular, the OECD has established Working Parties in an attempt to craft an international tax policy. Tax treaty issues are covered by Working Party 1 on double taxation. Working Party 2 is responsible for statistical work and looks at social and economic implications of tax policy. The taxation of multinational enterprises is covered by Working Party 6, Working Party 8 investigates how Member governments can co-operate to minimize the extent of tax avoidance and evasion and Working Party 9 examines consumption taxes. Although most of these groups have existed for many years, their mandates have altered as new policy issues have arisen. A number of other Working Parties on company taxes, on the taxation of international bond issues and the issue and negotiation of securities, and the taxation of energy (3, 4, 5 and 7) were wound up when their tasks were completed. In addition to these Working Parties, a number of ad hoc groups have undertaken detailed work on specific issues. Recent examples include a joint group of fiscal and environmental experts to consider the issue of eco-taxes, meetings with financial-market specialists to investigate the tax treatment of new kinds of financial transactions, and groups on transfer pricing. As from 1997/8, the Committee has a Forum on Strategic Management and a Forum on Harmful Tax Practices.

With the adoption of Council Directive 2002/38/EC on the VAT arrangements applicable to radio and television broadcasting services and certain electronically supplied services, the European Union has approved a value-added-tax on the sale of digital products (e.g. software, music, and audio/visual products) sold by non-EU companies to consumers resident in European Union countries. Internet retailers (e-tailers) have to register with a EU member state and pay taxes on the e-commerce transactions. EU Taxation Commissioner Frits Bolkestein has stated that the new rule established by the Directive “will remove the serious competitive handicap which EU firms currently face.” This Directive, which entered into effect on July 1, 2003, requires e-businesses to register with EU tax authorities and levy, collect and remit VAT based upon their supplying digital goods within the EU.

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ASSIGNMENTS

Discussion Board

Internet research assignment

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SUPPLEMENTAL DOCUMENTS

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IBLS ARTICLES

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