E-Commerce and Taxation

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E-COMMERCE AND TAXATION

Thousands of businesses are selling goods and services through electronic commerce, including the Web and private electronic networks. Selling through electronic commerce is a rapidly growing channel for sales to both retail consumers and businesses. Since about one-quarter of all state and local revenue comes from sales, use, and gross receipts taxes, the state and local governments are eager to avoid losing any tax revenue to electronic commerce. Traditional stores, however, now face heightened competition from electronic commerce sellers who are not collecting sales tax.

The major forms of e-commerce are:

- Business-to-business commerce: Many businesses are aggressively moving into business-to-business e-commerce because they want to cut costs, reduce order processing time, and improve information flow. For most firms, the rise in trade over the internet also coincides with a marked decrease in phone and fax use, allowing salespeople to concentrate on managing customer accounts rather than simple giving information or taking orders.

- Business-to-consumer e-commerce or online-retail sales: it operates on a substantially different model than does business-to-business e-commerce. Prior to e-commerce, there were two business-to-consumer models : retail stores and mail or phone order (including television shopping). The advent of internet and web technologies gave retailers the opportunity to take catalog businesses online, thereby reducing the costs of presenting products, increasing the frequency of sales by permitting around-the-clock shopping, and displaying accurate descriptions of merchandise that can be changed almost instantaneously.

- Online advertising revenue: According to the new eMail Marketing Report, total e-mail marketing expenditures in the U.S., which reached $898 million in 1999, will increase 417% to $4.6 billion by year-end 2003. It also noted that U.S. firms will increase their spending on e-mail ads by a factor of 20 over the same period, from $97 million in 1999 to $2 billion in 2003. The report, released by eMarketer, estimates that e-mail advertising's share of total online advertising spending in the U.S. will increase from 3% in 1999 to 15% by 2003.

This rapid growth of internet and internet commerce have attracted not only more and more business owners but also all local, state and federal taxing authorities, which have identified the revenue potential of the internet. When considering taxing of E-commerce the 3 important concepts to consider are:

Sales Tax. A sales tax is generally levied on the sale or transfer of tangible personal property (TPP) or certain enumerated services. Tangible personal property is physical property that is not permanently affixed to real property. For example, TPP sold through electronic commerce includes clothing, electronic devices, and books. Jurisdictions that levy sales tax generally tax all sales of TPP unless the statute provides for exemptions

Nexus. A sufficient connection, or nexus, is required between the parties to a transaction for the state or local taxing jurisdiction to have the legal authority to tax the transaction. Generally, nexus for sales tax purposes is determined by the physical presence of the seller. Determining nexus for some types of transactions, however, is extraordinarily difficult, and has been the subject of thousands of administrative rulings and judicial opinions. Transactions could have nexus in a particular state for income tax purposes, but not sales tax purposes.

Use Tax. A use tax is a tax on the receipt, possession, consumption, storage, or use of property. All jurisdictions that have sales taxes have enacted use taxes to cover transactions where no sales tax is collected. For example, if a sale of consumer goods is subject to a 5% sales tax when the sale takes place within the state, the state will enact a 5% use tax on...
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