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January - 2000 - issue > Legal Advice
Navigating Through E-Taxes
Saturday, January 1, 2000

Consider this scenario: I order a pair of Air Jordans from Nike while visiting family in New Delhi, India. I want the shoes delivered to my home in New York from the Nike factory in Manila, Philippines. Thanks to e-commerce on the Web, it takes me three minutes to buy my shoes. It’s that simple for me, the buyer. But is it that simple for Nike, Inc., the shipper?
Most countries have a tax on the sale of goods. To determine who got the better end of the e-deal, we must keep in mind that within each country, each state, city and district or local government may have its own variation of this tax. Consider this: New Delhi has a city and a state tax, and the country of India has a value-added tax and a special excise duty on the import of sports shoes. But — lucky me, I happened to order the shoes during Diwali, a national festival, where the State of Delhi has declared a half-tax week; Manila may decide that it will increase its taxes on export of shoes by 1.5 percent from November 3, the date the shoes have to be shipped; the Postal Department in New York may have levied special taxes on international packages arriving in the city for the next year to generate much needed additional revenues. Furthermore, the Upper West side of Manhattan may have recently enacted a local “use” tax applicable only in the few block district where I live. Add to this the fact that our sales clerk, who works part-time from his home in Dayton, Ohio copying orders from on-line to paper, is situated in a special zoning district that levies a special tax on people working from home.

Things were relatively easy when a local store sold goods to local consumers; there was only one set of laws to follow. What do e-businesses, who have neither the time nor the finances to track all the various permutations and combinations of laws spanning across the globe, do to comply with sales taxes worldwide?

Currently, sales taxes vary from each state in the country, to each nation in the world. They vary in the percentage that is taxed, the goods that are taxed and on how goods and services are taxed. They vary, additionally, on who collects the taxes. The same city may have different taxes — or no taxes — on the same item at different times in the year. If the same transaction is done over the Web, how do e-businesses know what items to tax, in which state, and at what time?

The US Department of Commerce believes that the number of Internet users and the number of Web pages both double every 100 days. With the explosion in e-commerce arises the issue of taxation of goods and services sold by e-businesses. After all, sale of goods and services has always been taxed by governments worldwide. If there is no taxation, governments will lose billions of dollars in revenue.

Web enthusiasts lobby for no taxes at all. They argue that the Web was created for a free exchange of information, ideas — and now, products. They argue that since e-commerce is still in the fledgling state, it needs to be carefully nurtured to maturity. Unnecessary legal quagmires may stifle its growth and cause its untimely death as a medium of commerce and exchange.

However, as wonderful as their arguments sound, business persons across the world realize that such statements may be idealism of the highest order — or just naivete on the part of some. With governments worldwide standing to lose billions of dollars in revenues annually, governments are sure to endeavor to shift the taxes on the sales of goods in shopping centers to sales of goods over the Internet. The question that is baffling even the United States Congress (and for which they have issued a moratorium, stalling the issue for 3 years while committees and associations reach a decision) is simply this: How to tax e-commerce?

In answer to this question, the United States Senate passed into law the “Internet Tax Freedom Act” last October. The act not only acknowledged that the Net needs room to grow, but that it is also inherently susceptible to multiple and discriminatory taxation in a way that commerce conducted in more traditional ways is not. Therefore, the US Congress decided to impose a three-year moratorium on Internet taxation. The House agreed that “the very technologies that make the Net so useful and efficient — notably its decentralized, packet-switching architecture — also means that several states and perhaps dozens of localities could attempt to tax a single Internet transaction. The ITFA will protect commerce conducted over the Internet from being singled out and taxed in new and creative ways, and will give Americans the reassurance they need that they will not be hit with unexpected taxes and tax collecting costs from remote governments.”

For all practical purposes, this means that until October 21, 2001, the state and local governments are barred from doing three things: imposing taxes that would subject buyers and sellers of e-commerce to taxes in multiple states; imposing discriminatory taxes on e-commerce businesses; and taxing goods and services that are sold exclusively over the Internet. The ITFA further bans federal taxation of e-commerce. To keep e-commerce from being subject to tariffs and discriminatory tax globally, the act calls on the Clinton administration to act aggressively actively for an international tax-free zone for e-businesses selling globally. It urges the President to seek bilateral, regional and multilateral agreements with foreign countries to keep tariffs and discriminatory foreign taxes off the Internet and e-commerce.

Thus, under ITFA, for the next 2 years, no two (or more) states can tax the same transaction. So, if you, from your home in New York, order a pair of shoes from Nike, with a site in Ohio, either New York or Ohio can tax you, not both. Also, states cannot impose discriminatory taxes on e-commerce businesses. Thus, if a state does not tax a mail order catalogue sale, it cannot tax the e-commerce sale of shoes either, even if it does tax in-store sales. Moreover, if goods and services are sold exclusively over the Internet, no taxes can be imposed on those sales for the period of the moratorium. Thus e-mail, Internet site selections, online bulletin boards and Internet search services cannot be taxed by either the state or the federal government until October 2001.

Although ITFA accomplishes much, if fails notably in other areas. ITFA does not ban the states that already tax e-commerce transactions. Some companies, like Gateway, routinely collect sales taxes from all their customers. Also, IFTA only bans taxation till October of 2001. What happens when the moratorium ends? ITFA offers no guidance on that, other than to appoint committees to study the problem and to suggest solutions.

This worst-case scenario that we are looking at, once the moratorium ends, is that e-businesses will have to wade into each country in which they have customers, offices, virtual offices or sales depots, to determine what laws they need to comply with, then try to figure out how to avoid paying double — or triple — taxes on the same goods and services.

However, this may not come to pass. Under ITFA, the US government has already put in place various committees to recommend ways to solve this complex issue. One such committee, the National Tax Association, suggests developing standardized categories for products and services, while allowing each state to decide which category they would tax, and by how much. Other committees appointed by the House will shortly follow suit with their recommendations. Also various organizations are also lobbying for other solutions, such as no taxation at all.

A best-case scenario is having Congress adopt legislation simplifying the tax structures or imposing a uniform sales tax across the board. Internationally, each government could sign bilateral treaties to keep international tariffs to a minimum.

Anu Gupta, practices immigration and internet/cyberlaw in the United States. She attended DePaul University in Chicago, Illinois, for both her undergraduate and her law degrees. Currently Ms. Gupta is in the process of authoring a book on immigration laws in the United States. Contact . anu@siliconindia.com.

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