Taxation: When 21st Century E-Commerce Collides With 20th Century Tax Laws.

The Internet might be called one of the greatest inventions of the 20th century. It has influenced everything from education to hobbies and pastimes. Some feel that one area is being altered more than any other -- commerce and the sale and distribution of goods and services (Amar, 1999). Certainly, the Internet increases the possibility of businesses extending the sale of goods and services to individuals and other businesses in other states and countries of the world.

These possibilities, however, also create dilemmas for the state governments and the U.S. federal government. The federal and state tax systems were implemented before the creation of the Internet and generally assumed a physical world -- with tangible goods and a definite place or location of workers.

This paper documents some of the difficulties the federal and state tax systems will face. For the federal government, some questions about the application of its income tax can be simply resolved based on other legal precedents or other forms of business activity, like working in the ocean or space. In addition, some new laws have been passed to clarify existing, pre-Internet rules.

The state governments, however, will have a much more difficult time with their sales and use taxes -- not based on the interpretations of laws but rather the economic reality of the situation. Most goods will be sold to residents living in other states. As the laws now stand, these other states cannot be forced to collect and remit sales taxes to originating state. In the absence of any changes to these laws, the end result may be large decreases in tax revenue collected by many states.

"Electronic commerce will provide an integrated collection of low-cost, reliable services to handle tremendous volumes of business and technical transactions. Organizations will be able to improve efficiency and accuracy, reduce costs while providing faster, more reliable and more convenient services and goods[ldots] New ways of doing business will become commonplace, including telecommuting and global sourcing arrangements[ldots]"

Summers, 1997.

"The only things certain in life are death and taxes."

Original author unknown.

Introduction

The Internet might be called one of the greatest inventions of the 20th century. It has or will change many ways in which society works and interacts, including the methods of conducting commerce and business (Amar, 1999). Company size and location may become irrelevant, markets perhaps will become frictionless and on-line shopping will become easier and less costly.