Taxing E-CommerceTaxing E-Commerce

Group 2Group 2

E-commerceE-commerce

Ecommerce is the buying and selling of Ecommerce is the buying and selling of goods and services, and the transfer of goods and services, and the transfer of funds, through digital communications.funds, through digital communications.

Business ModelsBusiness Models

Business Models can be broadly Business Models can be broadly

categorized as:categorized as:

• Physical delivery of tangible productsPhysical delivery of tangible products

• E-Delivery of digital productsE-Delivery of digital products

• Application hostingApplication hosting

• E-servicesE-services

Model 1: Electronic

order processing of tangible products

Model 1: Electronic

order processing of tangible products

Business Profits Business Profits

Online Order

Offline delivery of tangible goods

Customer

CommercialProvider

Model 2: Electronic ordering and downloading of digital products

Model 2: Electronic ordering and downloading of digital products

Online Order

Customer

CommercialProvider

Online Delivery

Online catalogOf software & digitalProducts (provided with No separate charge)

Business Profits Business Profits

Model 3: Application hosting-Bundled contract

Model 3: Application hosting-Bundled contract

Business Profits Business Profits

Customer

CommercialProvider

Server ownedBy Commercial Provider

Softwareloaded onServer

Contractual arrangement

Remote

acce

ss

Online Delivery

Single bundled fee

Model 4: Customer support over computer network

Model 4: Customer support over computer network

Business profits / Fees for technical services

No transfer of know-how, service incidental to sale of product

Transfer of know-how: application of special skill and know-how and not incidental to sale of product

Customer

CommercialProvider

Fee

Online Technical

support

E-commerce Taxation Issues

E-commerce Taxation Issues

Taxation Issues

Product sale Transfer Pricingrefers to the pricing of

goods and services within a multi-

divisional organization

Characterization of Income

Business connection/PE

ConsiderationsConsiderations

Things to consider:Things to consider: International boundaries or borders (where International boundaries or borders (where

is the transaction taxed)is the transaction taxed) Losses of government revenueLosses of government revenue Some believe imposition of taxes would Some believe imposition of taxes would

slow the growth and opportunities of e-slow the growth and opportunities of e-commerce, just before it gains a foothold commerce, just before it gains a foothold among consumers.among consumers.

Largely Internet purchases are not taxable.Largely Internet purchases are not taxable. There is much ongoing debate about e-There is much ongoing debate about e-

commerce taxation.commerce taxation. Taxation regimes are difficult to implement Taxation regimes are difficult to implement

on electronic purchases.on electronic purchases. Defining tax jurisdiction may be difficult.Defining tax jurisdiction may be difficult. The Internet eliminates borders between The Internet eliminates borders between

countries making businesses virtually countries making businesses virtually invisible invisible

ProblemsProblems

Problems Cont’Problems Cont’

Taxing the Internet may also drive Taxing the Internet may also drive away the dot.com to locations that away the dot.com to locations that do not tax them , if we impose taxes do not tax them , if we impose taxes that reduce their business. Many of that reduce their business. Many of the companies that engage in the companies that engage in commerce over the Internet do not commerce over the Internet do not have to be physically located in the have to be physically located in the United States.United States.

Interesting StudiesInteresting Studies

In June 1999 study concluded that 63% of business-In June 1999 study concluded that 63% of business-to consumer online sales were non-taxable (such as to consumer online sales were non-taxable (such as airline tickets, gambling, and interactive games). Of airline tickets, gambling, and interactive games). Of the remaining 37% of business-to-consumer sales, the remaining 37% of business-to-consumer sales, sales tax was paid on 4% (4% of the 100% of sales tax was paid on 4% (4% of the 100% of business-to-consumer sales), and 20% was a business-to-consumer sales), and 20% was a substitute for other remote sales for which no tax substitute for other remote sales for which no tax was collected, leaving 13% of total business-was collected, leaving 13% of total business-consumer sales untaxed. The study applied an consumer sales untaxed. The study applied an average state and local sales tax rate of 6.5% to average state and local sales tax rate of 6.5% to determine that the estimated sales tax loss was determine that the estimated sales tax loss was $170 million for 1998, representing one-tenth of 1% $170 million for 1998, representing one-tenth of 1% of total state and local sales tax collections.of total state and local sales tax collections.

Interesting Studies Cont’dInteresting Studies Cont’d

For the fourth quarter of 1999 alone, For the fourth quarter of 1999 alone, official government estimates show official government estimates show that the U.S. retail e-commerce sales that the U.S. retail e-commerce sales amounted to $5.3 billion, account for amounted to $5.3 billion, account for a miniscule but growing share of the a miniscule but growing share of the total retail sales estimated at $821.2 total retail sales estimated at $821.2 billion for the quarter.billion for the quarter.

Why are digital purchases not Why are digital purchases not taxable?taxable?

Back in the day goods were physical, the Back in the day goods were physical, the production, distribution and consumption of production, distribution and consumption of these goods were easily taxablethese goods were easily taxable

Difficult to determine the functions of digital Difficult to determine the functions of digital productsproducts

Taxing online sale of intangible is Taxing online sale of intangible is problematic because the location of problematic because the location of customers cannot be known with certainty.customers cannot be known with certainty.

Some purchases are intangible ex Some purchases are intangible ex indezine.comindezine.com

Internet Purchases and Internet Purchases and Current LawCurrent Law

The 105th Congress passed the The 105th Congress passed the Internet Tax Freedom Act (ITFA)Internet Tax Freedom Act (ITFA) in 1998. The act in 1998. The act established a three-year moratorium prohibiting state established a three-year moratorium prohibiting state or local taxing authorities from imposing new taxes or local taxing authorities from imposing new taxes on internet access or imposing multiple or on internet access or imposing multiple or discriminatory taxes on electronic commerce.discriminatory taxes on electronic commerce.

In November 2001, President Bush signed into law a In November 2001, President Bush signed into law a measure to extend for two years the moratorium on measure to extend for two years the moratorium on multiple and discriminatory e-commerce taxes. multiple and discriminatory e-commerce taxes.

In February 2003, several large retailers voluntarily In February 2003, several large retailers voluntarily decided to collect taxes on their online sales. Under a decided to collect taxes on their online sales. Under a deal with 38 states and the District of Columbia, deal with 38 states and the District of Columbia, consumers will pay sales taxes based on the state in consumers will pay sales taxes based on the state in which they live. Currently, the retailers only collected which they live. Currently, the retailers only collected taxes in states in which they have a physical taxes in states in which they have a physical presence.presence.

Global Initiative for Global Initiative for Addressing Tax-Related Issues Addressing Tax-Related Issues

in E-Commercein E-Commerce

OECDOECD

The OECD is an international agency The OECD is an international agency which supports programs designed to which supports programs designed to facilitate trade and development.facilitate trade and development.

The OECD has prescribed certain guidelines that they feel The OECD has prescribed certain guidelines that they feel governments should adhere to while formulating new governments should adhere to while formulating new provisions regulating taxation of e-commerce transactions:provisions regulating taxation of e-commerce transactions:

New technologies underlying electronic commerce New technologies underlying electronic commerce should use to improve the taxpaying service.should use to improve the taxpaying service.

those principles can be implemented for e-commerce those principles can be implemented for e-commerce through existing tax rules, albeit with some adaptation through existing tax rules, albeit with some adaptation of the latter; of the latter;

there should be no discriminatory tax treatment of e-there should be no discriminatory tax treatment of e-commerce;commerce;

Ensure a fair sharing of the tax base between countries, Ensure a fair sharing of the tax base between countries,

and avoid double and unintentional non-taxation;and avoid double and unintentional non-taxation;

When required, government intervention should be When required, government intervention should be proportionate, transparent, consistent, and predictable, proportionate, transparent, consistent, and predictable, as well as technologically neutral. as well as technologically neutral.

Would widespread taxation of Would widespread taxation of Internet transactions threaten Internet transactions threaten

personal privacy?personal privacy?

In a word…In a word…

YESYES

The approaches involved in taxation The approaches involved in taxation require notice to the government require notice to the government concerning private purchase concerning private purchase transactions in order to tax the transactions in order to tax the recipientrecipient, citizens would be , citizens would be understandably concerned about understandably concerned about privacy issues. privacy issues.

Conclusion Conclusion

India, a promising destination for e-commerce trade

E-commerce taxation policy should not act as a deterrent for doing business in India

Need to consider issues relating to the WTO while framing the e-commerce taxation policy

Websites of InterestWebsites of Interest

www.mackinac.org/article.asp?ID=2771www.mackinac.org/article.asp?ID=2771 www.law.wayne.edu/litman/classes/cyber/2000/www.law.wayne.edu/litman/classes/cyber/2000/

swartout.htmlswartout.html leahy.senate.gov/issuse/internet/leahy.senate.gov/issuse/internet/

CRSInternettaxation04.pdfCRSInternettaxation04.pdf www.cbpp.org/512webtax.htmwww.cbpp.org/512webtax.htm www.informationweek.com/story/showArticle.jhtm?www.informationweek.com/story/showArticle.jhtm?

articleID=18201906articleID=18201906 www.powerhomebiz.com/vol4/internet-taxation.htmwww.powerhomebiz.com/vol4/internet-taxation.htm www.taxprophet.com/faq/991114.htmwww.taxprophet.com/faq/991114.htm www.icasit.org/ecommerce/taxation/rjones.htmlwww.icasit.org/ecommerce/taxation/rjones.html www.qlinks.net/quicklinks/taxation.htmwww.qlinks.net/quicklinks/taxation.htm

http://www.ecommercecommission.orghttp://www.ecommercecommission.org http://www.cato.org/tech/taxandmonetarypolicy.html http://www.cato.org/tech/taxandmonetarypolicy.html http://www.salestaxsimplification.org/documents/http://www.salestaxsimplification.org/documents/

default.htm default.htm http://www.gigalaw.com/articles/taxes.html http://www.gigalaw.com/articles/taxes.html http://www.nga.org/nga/salestax/1,1169,,00.html http://www.nga.org/nga/salestax/1,1169,,00.html http://www.ecommercetax.com/SalesAndUseTax.htm http://www.ecommercetax.com/SalesAndUseTax.htm http://www.geocities.com/streamlined2000 http://www.geocities.com/streamlined2000 http://www.ryanco.com/gateway/electron.html http://www.ryanco.com/gateway/electron.html http://www.cob.sjsu.edu/facstaff/NELLEN_A/http://www.cob.sjsu.edu/facstaff/NELLEN_A/

ECOMM.pdf ECOMM.pdf