Ecommerce is the buying and selling of goods and services, and the transfer of funds, through digital communications.
Business Models can be broadly categorized as:
Physical delivery of tangible products
E-Delivery of digital products
Model 1: Electronic order processing of tangible products
Online Order Offline delivery of tangible goods Customer Commercial Provider
Model 2: Electronic ordering and downloading of digital products Online Order Customer Commercial Provider Online Delivery Online catalog Of software & digital Products (provided with No separate charge)
Model 3: Application hosting-Bundled contract Customer Commercial Provider Server owned By Commercial Provider Software loaded on Server Contractual arrangement Remote access Online Delivery Single bundled fee
Model 4: Customer support over computer network
Business profits / Fees for technical services
No transfer of know-how, service incidental to sale of product
Transfer of know-how: application of special skill and know-how and not incidental to sale of product
Customer Commercial Provider Fee Online Technical support
E-commerce Taxation Issues Taxation Issues Product sale Transfer Pricing refers to the pricing of goods and services within a multi-divisional organization Characterization of Income Business connection/PE
Things to consider:
International boundaries or borders (where is the transaction taxed)
Losses of government revenue
Some believe imposition of taxes would slow the growth and opportunities of e-commerce, just before it gains a foothold among consumers.
Largely Internet purchases are not taxable.
There is much ongoing debate about e-commerce taxation.
Taxation regimes are difficult to implement on electronic purchases.
Defining tax jurisdiction may be difficult.
The Internet eliminates borders between countries making businesses virtually invisible
Taxing the Internet may also drive away the dot.com to locations that do not tax them , if we impose taxes that reduce their business. Many of the companies that engage in commerce over the Internet do not have to be physically located in the United States.
In June 1999 study concluded that 63% of business-to consumer online sales were non-taxable (such as airline tickets, gambling, and interactive games). Of the remaining 37% of business-to-consumer sales, sales tax was paid on 4% (4% of the 100% of business-to-consumer sales), and 20% was a substitute for other remote sales for which no tax was collected, leaving 13% of total business-consumer sales untaxed. The study applied an average state and local sales tax rate of 6.5% to determine that the estimated sales tax loss was $170 million for 1998, representing one-tenth of 1% of total state and local sales tax collections.
Interesting Studies Cont’d
For the fourth quarter of 1999 alone, official government estimates show that the U.S. retail e-commerce sales amounted to $5.3 billion, account for a miniscule but growing share of the total retail sales estimated at $821.2 billion for the quarter.
Why are digital purchases not taxable?
Back in the day goods were physical, the production, distribution and consumption of these goods were easily taxable
Difficult to determine the functions of digital products
Taxing online sale of intangible is problematic because the location of customers cannot be known with certainty.
Some purchases are intangible ex indezine.com
Internet Purchases and Current Law
The 105th Congress passed the Internet Tax Freedom Act (ITFA) in 1998. The act established a three-year moratorium prohibiting state or local taxing authorities from imposing new taxes on internet access or imposing multiple or discriminatory taxes on electronic commerce.
In November 2001, President Bush signed into law a measure to extend for two years the moratorium on multiple and discriminatory e-commerce taxes.
In February 2003, several large retailers voluntarily decided to collect taxes on their online sales. Under a deal with 38 states and the District of Columbia, consumers will pay sales taxes based on the state in which they live. Currently, the retailers only collected taxes in states in which they have a physical presence.
Global Initiative for Addressing Tax-Related Issues in E-Commerce
The OECD is an international agency which supports programs designed to facilitate trade and development.
The OECD has prescribed certain guidelines that they feel governments should adhere to while formulating new provisions regulating taxation of e-commerce transactions:
New technologies underlying electronic commerce should use to improve the taxpaying service.
those principles can be implemented for e-commerce through existing tax rules, albeit with some adaptation of the latter;
there should be no discriminatory tax treatment of e-commerce;
Ensure a fair sharing of the tax base between countries, and avoid double and unintentional non-taxation;
When required, government intervention should be proportionate, transparent, consistent, and predictable, as well as technologically neutral.
Would widespread taxation of Internet transactions threaten personal privacy?
In a word…
The approaches involved in taxation require notice to the government concerning private purchase transactions in order to tax the recipient , citizens would be understandably concerned about privacy issues.
India, a promising destination for e-commerce trade
E-commerce taxation policy should not act as a deterrent for doing business in India
Need to consider issues relating to the WTO while framing the e-commerce taxation policy