lecture 11: tax and antitrust

45-848 ECOMMERCE LEGAL ENVIRONMENT SPRING 2004

COPYRIGHT © 2004 MICHAEL I. SHAMOS

Lecture 11:Tax and Antitrust



Purpose of Taxes

• Raise revenue• Implement policy• Political implications

– Politicians want taxes– But: don’t want their citizens to pay them– Favor “invisible” taxes (not paid by their voters)

• Over 20,000 taxing jurisdictions in the U.S.



Legal Authority for Taxes• “Congress shall have Power To lay and collect Taxes, Duties,

Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States.” U.S. Const., Art. 1 §8, clause 1.

• “No Tax or Duty shall be laid on Articles exported from any State.” U.S. Const., Art. 1 §9, clause 5.

• “No State shall, without the Consent of the Congress, lay any Imposts or Duties on Imports or Exports” U.S. Const., Art. 1 §10, clause 2.

• “Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.” U.S. Const., Amendment 16.

http://caselaw.findlaw.com/data/Constitution/article01/






Use Tax Example

• “an excise tax is hereby levied on the storage, use, or other consumption in this state of tangible personal property or the benefit realized in this state of any service provided.” Ohio Rev. Code §5741.02

• “Tangible personal property or services rendered upon which taxes have been paid to another jurisdiction [shall be reduced by] the amount of the tax paid to such other jurisdiction.”



Collection of Tax• National Bellas Hess, Inc. v. Dep’t of Revenue of Illinois,

386 U.S. 753 (1967)• Hess was a mail order house in Missouri and Delaware. It

sold significant amounts of goods to consumers in Illinois.• Illinois ruled that Hess had to collect use taxes for Illinois• Supreme Court: “If Illinois can impose such burdens, so

can every other State, and so, indeed, can every municipality, every school district, and every other political subdivision throughout the Nation with power to impose sales and use taxes.”

• One state cannot force another to collect its taxes



Collection of Tax• Quill Corp. v. North Dakota Tax Comm’r, 504 U.S. 298 (1992) • Quill had presence in Delaware, Illinois, California, and

Georgia• North Dakota required Quill to collect use taxes for North

Dakota• North Dakota Supreme Court found Hess to be obsolete

based on “remarkable growth of the mail order business”• U.S. Supreme Court: Commerce Clause is more than an

affirmative grant of power; it has a negative sweep as well. The clause ... prohibits certain state actions that interfere with interstate commerce

• North Dakota cannot force Quill to collect the tax



Collection of Tax

• No State … shall have power to impose … a net income tax on the income derived within such State by any person from interstate commerce if the only business activities within such State … are …

• (1) the solicitation of orders … in such State for sales of tangible personal property, which orders are sent outside the State for approval or rejection, and, if approved, are filled by shipment or delivery from a point outside the State …

15 U.S.C. §381• One state can’t tax a foreign corporation’s income from

sales on orders solicited in that state



Who Has the Right to Tax in Cyberspace?

• A tax is valid only if the activity taxed has a “substantial nexus” to the taxing state. (Due process.)

• State must have jurisdiction over the transaction and the taxpayer

• Can Pennsylvania tax an amazon.com transaction with a Pennsylvania consumer?– Can it force the consumer to pay use tax?– Can it force amazon.com to collect the use tax?



Eroding Tax Base

• Ecommerce transactions generate little tax– Many are interstate– More electronic goods– Many are unmonitored, unaudited– Underground economy: barter, auctions

• Total tax base is eroding• Proposed solutions:

– Value-added tax– Communications (bit) tax– National sales tax



Tax Definitions• Bit tax. Tax on electronic commerce measured by the volume of digital

information transmitted electronically. • Capitation. A tax imposed on an individual without regard to goods,

services or income• Duty. Usually, a tax imposed on imports into a country • Excise. A tax based on the value of services or property other than real

estate, levied on the home market.• Goods and services tax (GST). VAT on goods and services• Impost. Old word for a tax, now usually an import duty.• Sales tax. Tax on sales collected for the gov’t by a merchant• Tariff. Tax on the value of imported goods.• Use tax. Tax on the privilege of using goods within a jurisdiction• Value-added tax (VAT). Indirect tax on consumption assessed on the

increased value of goods at each point in the chain of production and distribution. Collected from the end user.



Taxation• Tax law deals with services (rendered by physical

people) and physical goods. When goods are electronic, problems arise.

(No sales tax in New Hampshire, Oregon, Massachusetts, Alaska, and Delaware)

Tax No Tax Not ClearInternet Access 16 29 1

Sales of Goods 44 0 2

Downloaded Sales 24 18 4

TAX STATUS BY NUMBER OF STATES



Value Added Tax (VAT)

• Fixed tax imposed at each stage of production of goods.

• The total tax is built into the cost of goods• Exports are not taxed. All imports are taxed.• No tax forms or tax returns for individuals. Eliminate

the need for the IRS.• Cost of compliance estimated at $5 billion per year,

about a hundred times less than the current system.



VAT Example (17.5% in UK)Transaction Input

VATPrice

w/o VATOutputVAT

TotalPrice

Net VATPayable

1. Forrester sells timber

0 1000 175 1175 175

2. Pulp factory makes pulp

175 3000 525 3525 350= 525-175

3. Paper factory buys pulp, makes paper

525 6000 1050 7050 525

4. Wholesaler buys bulk paper

1050 8000 1400 9400 350

5. Retailer sells paper to consumer

1400 12000 2100 14100 700= 2100-1400



Internet Tax Freedom Act

• Moratorium from Oct. 1, 1998 - Sept. 30, 2001 on– New taxes on Internet access– Multiple or discriminatory taxes on Ecommerce– Exception for material “harmful to minors”

• Extended through Nov. 1, 2003• Now expired. Bills to continue it are pending• EU is considering a bit tax. UN: 1 cent for 100 emails



Antitrust Law

• Protect consumers by inhibiting use of monopoly power

• What’s wrong with monopolies?– Unchecked prices. Without competition, no

pressure to keep prices low– No incentive to invest in R&D, improvement– Lack of consumer choice



Sherman Act (1890)

• “Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.” 15 U.S.C. §1. Fine: $10 million + 3 years

• Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony. 15 U.S.C. §2. Fine: $10 million + 3 years



Sherman Act (1890) Prohibits Price fixing Advertising agreements Bid rigging Market allocation by competitors – exclusive territories Market tampering – illegal agreements that affect market behavior Coordinated use of information – collusion, costs Output planning Collective exclusionary activity – boycotts,

concerted refusal to deal, e.g. agreement not to sell to price-cutters All are illegal regardless of purpose or effect



Clayton Act (1914)

• Outlaws kickbacks (payments must be for services)• Can’t discriminate in price against purchaser of a

commodity bought for resale (to further a monopoly)• Can’t sell at low prices to harm or destroy a

competitor• Can’t sell on condition that buyer not buy products of

a competitor• Can make “due allowance for differences in the cost

of manufacture, sale, or delivery.”15 U.S.C. §12



Clayton Act (1914)

• “Whenever the United States is hereafter injured in its business or property by reason of anything forbidden in the antitrust laws it may sue therefor in the United States district court for the district in which the defendant resides ... and shall recover threefold the damages by it sustained and the cost of suit.” 15 U.S.C. §15a.

• Allows action by state attorneys general



Collaboration Among Competitors Permitted if the “rule of reason” is satisfied Antitrust conduct which is not a per se offense is judged by

the reasonableness of the activity.When otherwise unlawful action is found, if the action is ancillary to some lawful activity, and its procompetitive consequences outweigh its anticompetitive effects, it will be allowed.

Examples: Combination of capital, technology or assets to achieve a result not

available to any single party Efficiency-enhancing integration



B2B Exchanges

Permitted if the “rule of reason” is satisfied Potential anticompetitive harm: Increased ability to

raise prices lower output, quality, service or innovation collude through exchange of data

Monopoly or monopsony (combination to reduce prices) risk



Safety Zone Agreements not challenged if: Not facially anticompetitive Meet ONE of these criteria:

Parties occupy less than 20% of the market Three or more independent entities exist with assets, skills

and incentive to develop a close substitute In licensing arrangements, four or more independently

controlled technologies exist that could be substituted



U.S. v. Microsoft• The offense of “monopoly power” requires two elements:

(1) the possession of monopoly power in the relevant market; and(2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.

• Monopoly power: can consumers turn to other suppliers? In the Intel-compatible O/S market, no.

• Is Microsoft’s conduct “exclusionary”? (Has it restricted significantly the ability of other firms to compete in the relevant market on the merits of what they offer customers?)



U.S. v. Microsoft (Tying)• Tying:

(1) two separate "products" are involved;(2) the defendant affords its customers no choice but to take the tied product in order to obtain the tying product;(3) the arrangement affects a substantial volume of interstate commerce; and(4) the defendant has “market power” in the tying product market.(Have to take Windows Explorer to get Windows)

• Microsoft says: OS + browser are one integrated product

• “commercial reality is that consumers today perceive operating systems and browsers as separate products, for which there is separate demand.



U.S. v. Microsoft

• OEMs(1) Microsoft bound IE to Windows with contractual and technological shackles to ensure the prominent (and ultimately permanent) presence of IE on every Windows user's PC system, and to increase the costs of installing and using Navigator;(2) Microsoft imposed limits on the freedom of OEMs to reconfigure or modify Windows 95 and Windows 98 in ways that might generate usage for Navigator;(3) Microsoft used incentives and threats to induce OEMs to design their distributional, promotional and technical efforts to favor IE over Navigator



U.S. v. Microsoft• Internet Access Providers (IAPs)

(1) Microsoft licensed Internet Explorer and the Internet Explorer Access Kit to hundreds of IAPs for no charge;(2) Microsoft gave payments and rebates to IAPs that upgraded existing subscribers to software that came bundled with Internet Explorer instead of Navigator

• JavaMicrosoft maximized the difficulty with which applications written in Java could be ported from Windows to other platforms

• Exclusive dealing arrangementsMicrosoft required dealers to promote and distribute Internet Explorer to the exclusion of Navigator in return for payments and technical support



QA&

lecture 11: tax and antitrust

Documents

taxing state

use taxes

certain state actions

taxcollection of taxno

use tax examplean excise

net income tax

north dakota tax commr

commerce clause