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Taxation on the Internet

Taxation on the Internet. Wolguine Stervil. Introduction. The purpose of the discussion : Explosion of E-Commerce Tax Law before E-Commerce Politics view on Tax Brick and Mortars View Resulted Tax Law. Explosion of E-Commerce.

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Taxation on the Internet

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  1. Taxation on the Internet Wolguine Stervil

  2. Introduction The purpose of the discussion: Explosion of E-Commerce Tax Law before E-Commerce Politics view on Tax Brick and Mortars View Resulted Tax Law

  3. Explosion of E-Commerce • When the Internet was dreamed up, no one knew how E-commerce was going to blow. • 4th Quarter of 1999 Consumers spent >5.3 billion in sale, 64% was the total retail sale for that quarter • Gartner Group predicts that B2B E-Commerce will exceed 7 trillion in 2004. • Internet Commerce has touched all aspect of business: Technology Infrastructure,B2B,B2C, new business portal,growth and decline of tech stocks, and new marketing strategies

  4. Tax Law before E-Commerce • Online sale caught the eye of business execs, local, federal and state political leaders. • They wanted to know if the Internet should be taxed. • Existing tax law did have the internet in mind. • Internet allows anyone with net access to make purchase from anywhere in the world. • Questions that were being asked: Should the internet be taxed? If yes, then how can we developed a system to make it fair for everyone?

  5. Tax Law B4 E-Commerce Cont. • How can you regulate tax, while continuing to support the growth of the internet? • When is a shoe not a shoe? • How do you tax someone internationally? • To tax or not to tax is the million dollar question

  6. Politics view on Tax • Taxation on anything is the constant political hot potato • State governments want to tap in this new source of revenue to pay for schools, roads and critical infrastructure. • State, local governments and Brick-n-Mortars are pro-tax. • NGA & NRF tried to find ways for the B&M to compete fairly with the dotcomers.

  7. Political View Cont. • 2 issues arose: 1) State officials has the right to collect tax 2) Tax Fairness Laws to make it fair for B&M and dotcom. • The states have the right to collect tax on goods and services within the state • State revenues consist of Property Tax, Individual Income Tax, Corporate Income Tax, and sales and gross receipt taxes.

  8. Political Views Cont. • Forrester Research conducted a study that 13 billions of taxable items was sold online but 20% was tax, as a result of 525 million in tax loss. • Sales and use taxes are charged to the consumer. • It’s the merchant who is required to collect the tax and send it to the states’ authorities

  9. Political View Cont. • This works when the consumer is located in the same state as the vendor or merchant. • Scenario changes when a consumer purchases something from an out-of-state. • The physical presence/nexus requirement is based on 2 important Supreme Court Decisions: The 1967 National Bellas Hess decision and and the 1992 Quill decision

  10. Political View Cont. • The Supreme Court ruled that a state could collect sales and use taxes if the business has a physical presence in the state. • Physical presence can include any office, distribution house, sales office, warehouse, etc, as well as an agent, salesman, or representative to take orders. • If the business did not meet that requirement, then the state could not require the business to collect sales taxes • Due to the complexity of the different state and local sales taxes. • This complexity was seen as a barrier to interstate commerce.

  11. Political View Cont. • To further complicate the issue, in 1998, Congress passed and President Clinton signed into law the Internet Tax Freedom Act (ITFA). • This law imposes a 3-year suspension on new Internet taxation. • States are prohibited from imposing any new taxes on Internet sales exactly at the time when Internet sales are heating up

  12. Brick and Mortars View • Brick-and-mortar business owners are at a disadvantage with Internet businesses. • The brick-and-mortar stores are required to collect sales taxes. • Internet businesses are not required to collect sales taxes. Except when they conduct with consumers in its own state. • Consumers and businesses will opt to make their purchases online, rather than at the brick-and-mortar stores.

  13. Brick & Mortars Cont. • Brick-and-mortar loses and so do the states, which cannot collect the sale taxes. • States also have to contend with another problem: the click-and-mortar trend. • Wal-Mart and K-Mart are Click and Mortars that have created Internet businesses that are separate and distinct from their brick-and-mortar counterparts. • They can take advantage of the Quill decision and avoid sales and use taxes. • Another blow to state tax revenues .

  14. Conclusion..Resulted Tax Law: • The Advisory Commission on Electronic Commerce (ACEC) met for the final time in March 2000 and failed to reach the broad consensus required by Congress. • Advisory Commission recommended to congress the following (which was not adopted): 1)Repealing the 3 percent federal excise tax on telecommunications services. 2) Permanently barring states and local tax jurisdictions from taxing Internet access fees 3) Encouraging states to find a more simplified state sales and use taxation system 4) Extending the suspension on multiple and discriminatory taxes until 2006 .

  15. Conclusion..Resulted Tax Law: • To be continued…..

  16. References: • References 1. “Retail E-Commerce Sales for the Fourth Quarter 1999 Reach $5.3 Billion, Census Bureau Reports.” United States Department of Commerce News, March 2, 2000 http://www.census.gov/mrts/www/current.html • 2. Linda Rosencrance, “Report: Biz-to-Biz E-Commerce Exploding.” InfoWorld, March 24, 2000 http://www.infoworld.com/articles/ic/xml/00/03/24/000324icb2b.xml • 3. Christopher Swope, “With Congress’ Internet Tax Commission deadlocked, governors and mayors are desperately seeking solutions to their e-commerce sales-tax dilemma” http://www.boe.ca.gov/members/dandal/eleccomm/marchissue.htm

  17. References Cont.. • 4.The Internet Tax Fairness Coalition, “Facts about Electronic Commerce and Taxation” http://www.nettaxfairness.org/facts/default.html • 5.Federal "Moratorium" on Internet Commerce Taxes Would Erode State and Local Revenues and Shift Burdens to Lower-Income Households by Micheal Mazerov and Iris J. Lav May 11, 1998 http://www.cbpp.org/512webtax.htm#Summary • 6.Internet Tax http://www.nado.org/legaffair/internet.html • 7.The Future of Internet Taxation, The San Francisco Examiner Newspaper,November 14, 1999, http://www.taxprophet.com/faq/991114.htm • Turban, Lee, King, Chung Electronic Commerce: A Managerial Perspective, Prentice Hall 2002

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