INTERNET TAXATION.   Term Paper ID:25577 Click to get this paper

Essay Subject: Legal & regulatory aspects (local, state & federal), impact on electronic commerce & internet service providers, industry views, global issues. Table of Contents.... More...

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Paper Abstract: Legal & regulatory aspects (local, state & federal), impact on electronic commerce & internet service providers, industry views, global issues. Table of Contents. Paper Introduction: Table of Contents Table of Contents  Introduction  Literature Review  Social and Political Implications of Internet Taxation  Applicable Businesses  The Internet Industry's Views on Taxation  Global Factors Affecting Internet Taxation  Failed Internet Taxation Proposals  The Internet Tax Freedom Act  The Aftermath of the Internet Tax Freedom Act  Internet Taxes After the Internet Tax Freedom Act  Project Design  Government Sources  Other Sources  Results  Conclusions  Recommendations  References  Introduction Electronic commerce is rapidly becoming a common way for individuals to transact business with companies located both locally and throughout the world. Retailers recognize the potential of electronic commerce and respect the low overhead that it commands (by reducing the need for a physical presence); consumers respond to the convenience and the often low prices which are offered on the Internet. Government agencies also recognize the potential of electronic commerce in the tax revenues which such commerce represents. Tax laws were designed for a traditional manufacturing society where companies had clear physical presence in a particular location; these laws are difficult to apply to el Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. This meets with approval byother telecommunications companies, but has been met with resistance by theelectronic commerce industry as a whole. There was no concern about tax issues at this point because thenetwork did not yet have commercial applications. North Dakota, the court ruled thatalthough the company had licensed software in North Dakota for use bycustomers, the company had no physical presence in the state and that thepresence of the software was not enough to justify the nexus requirement.Sales were not made solely through the Internet (the company mailedcatalogs to customers in North Dakota), but ITAA believes that the courtwould rule in a similar manner had the delivery method been the Internetrather than printed catalogs since the presence is even more removed fromthe customer (Cayo, n.d., p. 244). The ITAA also holds that the same criteria should be used to establishan agency relationship for tax purposes regardless of whether the commercetakes place at a physical location or on the Internet. The ITAA alsoholds that increased Internet activity will generate increased activity inthe "tangible" world, with the result that states will see increases inpayroll taxes, income taxes and property taxes as well as through salestaxes as workers supporting the Internet enjoy higher wages (Cayo, n.d., p.9). Originally introduced in March 1997, the Act underwentconsiderable revisions as lawmakers worked with local governments andindustry to reach a compromise which could be passed. At the same time,local and state governments are interested in maintaining a steady sourceof revenue, so published sources such as Nation's Cities Weekly wereconsulted to obtain the points of view of these agencies. This is due to theleadership position held by the United States with regard to electroniccommerce. Instead,the issue is not whether to tax the Internet, but how to tax it in such away that the greatest benefit accrues to the United States and that theUnited States maintains control over taxation issues (Erickson, 1999, p.59). 58-59. However, shipping costs donot escalate in a linear fashion, and consumers are able to purchase "large-ticket" items such as furniture or computers on the Internet and pay farless in shipping and handling than they are saving in sales taxes. (1998, September 7). 2). The Act bans taxing Internet access for three years (until 2 1).This means that state and local governments are prevented from implementingnew taxes on ISP access such as the $19.95 paid by many America On Linesubscribers on a monthly basis. Thus while property which is owned by a company istypically used as evidence of tax nexus, the location of a server is not,according to the ITAA, evidence of income generated in that location. Christian Science Monitor,p. The strategyimplemented by the United States, which will be designed to protect itsindustries while avoiding the creation of tax havens elsewhere, is certainto be carefully scrutinized by the nation's foremost trading partners,including the European Union, Canada and Australia (Shafroth, 1999, p. Recognizing that the Internet is a new type of commerce, Congressadopted the Internet Taxation Freedom Act in 1998; this followed 18 monthsof negotiation among legislators, business leaders and local officials. Business held that if a company did not have a physical presence ina particular state, it could not reasonably be expected to collect taxesfor that state. 6). The tax moratorium is thus in place until October 21,2 1 unless legal action pending in various courts results in a terminationof the moratorium (Cox, 1999, p. Since the United States is the "world leader" in informationtechnology, those jobs (which are perceived as being highly skilled andhigh paying) are based largely in the United States. However, not all governments have been anxious to aggressively pursuethe taxation issue. Consumers who purchased items should not be able to avoidpaying taxes merely because they were making the purchases on the Internet. These analysts consider sales taxes to be use taxes andthat the businesses merely collect the tax for the government. According to Senator Byron Dorgan, "Norquist is toconsumerism what professional wrestling is to the dramatic arts," astatement which reflects Norquist's position as president of Americans forTax Reform, a politically active group which favors lower taxes (Guidera,1999, n.p.). The fact that the Internetis still a new medium is one reason that no clear-cut guidelines have beendeveloped; other reasons include the fact that it evolved from severaldifferent systems without any one coordinating agency, and the fact that itmakes possible international commerce on a scale never before available.Several commissions have been formed which will make nonbindingrecommendations to different agencies (including Congress), but the needsand demands of different stakeholders will make agreement difficult toreach. Some states have suggested that the relationshipbetween ISPs and the telecommunications companies creates an agencyrelationship and that the ISPs should be held to the same tax nexus as thetelecommunications companies. Also,multiple servers are often used to provide greater service continuity sothat it may be impossible to isolate which server is providing access forwhich transactions. Certainly such information is available whenitems are shipped to a physical address (Shafroth, 1999, p. The National Tax Associationproject reached general consensus that the source of transactions should beeither the state of use or the state of destination to the extent that suchinformation is available. If states impose sales taxes on servers located within thatstate regardless of where the purchaser is located, international consumerswill be placed in the awkward position of paying state sales tax on theirtransactions. The ISP may move thelocation of a Web site from one server to another based on demand andservice levels; the change is transparent to the vendor and customers, butresults in a situation where it is extremely difficult to determine whichtransactions were made from which server and thus are subject to whichtaxes (Cayo, n.d., p. (1999, April). In Quill Corp v. If ISPs provide telecommunications services to their customers, thenthey would be subject to the taxes paid by such utilities. 1). California was the sixth state which passed a moratorium usingthe reasoning that taxation would inhibit growth of an industry which, leftuntaxed, would provide considerable economic growth ("To Tax," 1998, n.p.). Because the moratorium is slated to last for three years, someanalysts are concerned that businesses will make strategic decisions in themeantime that will be difficult to reverse when the moratorium is lifted;this, they argue, will make it difficult to lift the moratorium at all.For example, in order to take full advantage of the moratorium, companiesmay close down "brick and mortar" stores or not open new stores for theperiod of the moratorium. 4). The National League of Cities is anxious that it have an active rolein the creation of whatever taxation system is adopted because its membershave considerable revenue sources at stake. Additional "neutral" representatives are included,such as one representing the Treasury Department. The National Tax Association's efforts are particularly importantsince the commission mandated by the Internet Tax Freedom Act was notappointed per the Act's own guidelines. The Senate version also went through numerous revisions, butit generally mirrored the bill put forth in the House. (1999, March 1 ). The Act, which took effect in October1998, is seen by its advocates as a way to give the Internet time to growand expand while preventing predatory taxation which would inhibit thatgrowth. E-commerce also encompasses companies which advertise on the Internet, andwhich may even take orders on the Internet, but which ship their productsto customers using common carriers such as United Parcel Service or FederalExpress. In keepingwith the spirit of the Act, the commission will seek taxation policieswhich support the non-multiple and nondiscriminatory provisions of the Act. 1 . With international as well as local governments taking aninterest in this issue, it is one which will require careful considerationwithin the next three years. This approach places considerableburden on states and local governments to determine where a purchaser islocated with regard to Internet purchases (since purchasers could belocated anywhere in the world), but illustrates the difference in howvarious stakeholders view the issue ("To Tax," 1998, n.p.). Those states which had already implementedsuch access taxation, including Connecticut, Wisconsin, New Mexico andSouth Carolina, among others, will be allowed to maintain those taxes.Some of these states, including Connecticut and South Carolina, indicatedthat they would abide by the moratorium (Cox, 1999, p. 1 ). There is no clear consensus as to how this new form ofcommerce should be taxed; indeed, there is not agreement as to what typesof transactions should be subject to taxation. Some analysts calculate that Ohio alone will"lose" more than $165 million in 1999 tax revenues because of the taxmoratorium (Alster, 1999, p. The League expects that futuretaxation laws and regulations will be significantly different from thecurrent laws because Internet commerce is a vastly different type ofcommerce than that which is currently commonplace in cities and towns.However, the League is adamant that just because the Internet has not beentaxed up to this point it should never be taxed in the future. Shafroth, F. Congressional activity,activity at the state and local government level, and activity conducted onbehalf of the electronic commerce industry should all be monitored to keepcurrent with developments in this area. Since most of the debate surrounding Internet taxation focuseson state tax issues, and particularly on sales taxes, federal taxation isnot typically considered to have a significant impact at this time (Cox,1999, p. Particular attention has been given to creating asituation where taxes are collected and allocated to individual statesbased on the total percentage of sales in that state (Shafroth, 1999,p. When the cost of the item in question is small, thesecosts can be a significant percentage of the purchase price and may work to"even out" the benefit of not paying sales tax. Regressive taxes are those whichpose a greater burden to the impoverished because they pay a higherpercentage of their income in taxes. At thesame time, the Act also requires the Commerce Department to report toCongress on barriers which may pose an impediment to American companieswhich are engaged in electronic commerce abroad. Nation's Cities Weekly, p. The Internet Tax Freedom Act and salestax. During the 199 s, business began to explore the potential ofthe Internet and World Wide Web, and in the late 199 s, electronic commercebecame not only a viable means of conducting business, but an integralmeans of conducting business for many companies. The"discriminatory" provision is designed to protect on-line vendors andconsumers from paying taxes to retailers who might have a "nexus" in aparticular location, but where that tax nexus is not necessarilyuniversally accepted. The Internet Industry's Views on Taxation Writing for the Information Technology Association of America (ITAA),Carol Cayo addresses issues surrounding electronic commerce and taxation atthe state and local level. Internet address: http://itaa.org/P7.htm. Cox's Internet article also details the legislative history of theInternet Tax Freedom Act, which was originally introduced in 1997 but whichwas neither passed nor implemented until Fall 1998. Government sources, such as those ofRepresentative Chris Cox, will be used to illustrate the Internet TaxFreedom Act since the government os the entity which implemented thisparticular piece of the Internet taxation structure. Thus, according to Cayo, the Itnernet is notan entity unto itself, but is an international, "open-ended aggregation ofcomputer and communications networks, people who use those networks, andresources that can be accessed from those networks" (Cayo, n.d., p. If other taxes are imposed to helpmake up for these losses, those taxpayers will in effect, according tocritics, be subsidizing electronic commerce (Alster, 1999, p. The commission's recommendations will not be binding on Congress, but areexpected to carry significant weight (Cox, 1999, p. 1 ). Proposal calls for Internet sales tax. 2).The Internet is dynamic and not subject to the control of any one entity. Other industry analysts are concerned that businesses are makingstrategic business decisions today which will be difficult to reverse inthree years, and that there will be increased pressure to maintain a tax-free Internet with regard to companies and transactions in the UnitedStates. Because the Internet evolvednot from a single entity but rather from a loose collection of governmentand academic networks which, for the first several decades of itsexistence, did not have commercial application or users, taxation andcommerce were not considerations which were associated with the Internetinitially. City leaders vow to push for InternetTax. It istherefore irrelevant whether a business has a physical presence in aparticular location and entirely relevant where the purchaser is located asto which taxes are appropriate to levy. Still other states have maintained that InternetService Providers are telecommunications utilities, and have taxed themaccordingly in order to build their tax base. In the 198 s, the National Science Foundation created a networkwhich linked university supercomputers to create a single network forresearch and academic sites. Results The results of the literature review reveal that the issue of Internettaxation is a complicated field with international ramifications even whenthe issue being considered is state taxation. This 64-member panel was composed of state and localgovernment officials as well as industry leaders and so-called "neutral"members. This research examinesthe issue of taxation and electronic commerce with particular attentiongiven to the taxation of Internet Service Providers (ISPs) by state taxagencies, the Internet Tax Freedom Act, and the various points of view ofthe stakeholders participating in this international debate. The Internet DevelopmentAct of 1998 would have required that taxes be collected by merchanes or anindependent tax collector using a pre-approved software package which wouldcalculate the appropriate sales tax for each transaction. Applicable Businesses Among the many questions which must be answered by either the NationalTax Association commission or the Internet Tax Freedom Act's commission arewhat types of businesses can and should be taxed. Companieswould be forced to deal with the multitude of tax laws and thecomplications imposed by where servers are located. Some are calling for themoratorium's early lifting; others want to see a permanent moratorium onInternet taxation. The commission is supposed toinclude eight representatives from business and consumer groups, and eightrepresentatives from state and local government. Because the Internet hasan international presence, this could potentially include any Americancompany which engages in Internet transactions (Cox, 1999, p. 7). Those companies which donot have a significant Internet presence are not in favor of a tax-freeInternet retail environment while those companies who intend to create anInternet presence are eager to take advantage of a tax environment whichoffers significant benefits over traditional retail methods. NSF closed its backbone and shifted operations toindustry, and to seven companies in particular: America On Line (which hadmanaged some of the pprevious backgone), Apex Global Information, BBN, MCI,PSInet, Sprint and UUNet. Orenstein, A. Amore complex problem arises when the issue is taken to the vendor and thelocation of a Web site. the Internet evolved from ARPAnetwhich was created by the Department of Defense in 1969. 1). This may mean that cities cede some of the powersthat they have traditionally held in the past in order to secure a stablesource of revenue for basic services, and in order to adapt to the changesin the business environment brought about by the Internet (Shafroth, 1999,p. The Communications and Electronic Commerce Tax Project includes amongits members representatives from state and local governments as well asrepresentatives from business; the commission is not weighted in favor ofany of these members. 1). The Internet exacerbates this disparity even more since it requiresa significant capital investment (access to a personal computer, access toan ISP and generally access to a credit card) in order to participate inelectronic commerce. Internet Taxes After the Internet Tax Freedom Act The moratorium on Internet taxes only postpones the Internet taxissue. Internet address: http://www.house.gov/cox/nettax/lawsums.html. (1999). The international nature of the Internet also comes into the situation atthis point because Internet consumers can be located anywhere in the world,and nations have a particular stake in keeping their citizens from payingtaxes to foreign entities. Wall Street Journal, n.p. Net taxation is a global issue.Upside, pp. The Act also creates a temporary Advisory Commission on ElectronicCommerce whose mission will be to study electronic tax issues and reportback to Congress within 18 months. Literature Review Because of the import of this issue to business and local government,considerable analysis has been performed and is readily available in thefield. Cox worked toreconcile these two versions and eventually developed a bill which hebelieved addressed the concerns of local and state officials and which alsoincluded language which reflected concerns of the Federal CommunicationsCommission. If thecommission determines that taxation is appropriate, it will makerecommendations as to how that taxation should be implemented. However, theFederal Communications Commission has ruled that enhanced services are nottelecommunications services and therefore are not subject totelecommunication taxes. Failed Internet Taxation Proposals Alison Orenstein reviews a proposal by the National GovernorsAssociation (NGA) which would have required each state to implement asingle statewide tax on electronic transactions. 1). At the heart of this project was the goal ofmaking the tax system competitively neutral at the state and local level(so that no tax havens are created), but any type of national tax system,even one which allocates funds to individual states, is vigorously opposedby the electronic commerce industry (Shafroth, 1999, p. There are other potential agency relationships in the world ofelectronic commerce which have tax implications. 1). Government Sources Because of this, a variety of sources have been used to provide anaccurate and balanced report. Instead, the commissioncontains 12 appointees proposed by the electronic commerce industry; theconsumer representative to the commission is a registered Microsoftlobbyist. The National Tax Association operates in this complicated environmentand created a panel of its own to look into the issue of electroniccommerce taxation. Key Congressional leaders and the WhiteHouse agree that the commission is inconsistent with the Act that createdit, but there has been little effort put toward rectifying the commission'scomposition. According to the National League of Cities,Internet shoppers were able to avoid more than $91 million in state andlocal taxes during 1998. Also, although theUnited States is currently the dominant nation participating in electroniccommerce, the Internet is rapidly being embraced as a viable medium fortrade in many nations and the actions taken by the United States now couldwell have long-term ramifications. Straight talk: Internet, tax and interstatecommerce. The moratorium also extends to products and serviceswhich are sold only through the Internet and which are not otherwiseavailable through any other venue (Cox, 1999, p. (1999, February). States and local governments thus not only use the potentialrevenue from Internet sales, but also lose real revenue from closedstorefronts. The UnitedStates is one of the few leading economies which does not have a nationalconsumption or national sales tax in place; European Union nations havevalue-added taxes in place (as do many other nations). In the House ofRepresentatives, the Act was referred to two committees, Judiciary andCommerce, which produced their own versions of the bill. The moratorium also prevents state and local governments from imposing"multiple and discriminatory" taxes on electronic commerce. The requirement for a physical presence in thestate in question would be eliminated. Local andstate governments are considering the ramifications of having electroniccommerce proceed completely untaxed; not only does such commerce representa loss of sales tax revenues, but property taxes are lost as well since thephysical presence required by Internet retailers can be considerably lessthan that required by traditional retailers. Global Factors Affecting Internet Taxation While the ITAA actively opposes direct taxation on Internet activity,other analysts maintain that governments have historically actively pursuednew forms of commerce as representing new sources of tax revenue. 1). The effects of the tax moratorium are considered by Norm Alster as heconsiders whether the benefits of Internet commerce as promised byproponents of the tax moratorium are likely to come to fruition. Cayo, C. (1999, March 11). The ITAA is a trade association which reprsentsthe computer software industry and which has more than 11, membercompanies who provide Internet access, on-line services, telecommunicationservices, various types of software, programming services and intranetdevelopment products. States which have a high level of electronic commerce(such as California), have taken a pro-business stance which favors lowlevels of taxation. The Internet Tax Freedom Act Chris Cox, a Republican congressional representative from SouthernCalifornia, co-authored the Internet Tax Freedom Act and has generated a"plain English" summary of the Act. The Act calls on the White Houseto make the Internet a tariff-free zone; this can be accomplished throughworking with the European Union and the World Trade Organization. By 2 3, the number of American householdsconnected to the Internet is forecast to reach 4 million, with more than$1.23 trillion in taxes at stake (Guidera, 1999, n.p.). References Alster, N. Some of the problems associated with taxation and the Internet comeabout from the way the Internet evolved. As a result, any report which the commission prepares islikely to be viewed with suspicion by those outside the electronic commerceindustry (Shafroth, 1999, p. 6. The Act also addresses federal tax issues, and creates a "Sense ofCongress" that there should not be federal taxes imposed on Internet accessor transactions (it is not clear what this "sense of Congress" actuallycreates). The National TaxAssociation commissioned a project consisting of 64 of its members chargedwith presenting a final report containing recommendations regardingtaxation on electronic commerce and telecommunications. Because of this, theITAA suggests that the Internet is of national importance and a criticalpart of the nation's economic future (Cayo, n.d., p. (1999, April 5). Many ofthese analysts suggest that the United States should leverage itsleadership role in electronic commerce to set forth taxation guidelineswhich the rest of the world can follow, or risk having the rest of theworld put the guidelines into place and force the United States to abide bythem if the US is to continue conducting electronic commerce on aninternational basis. Table of Contents Table of Contents 1 Introduction 2 Literature Review 2 Social and Political Implications of Internet Taxation 3 Applicable Businesses 4 The Internet Industry's Views on Taxation 5 Global Factors Affecting Internet Taxation 1 Failed Internet Taxation Proposals 1 The Internet Tax Freedom Act 11 The Aftermath of the Internet Tax Freedom Act 14 Internet Taxes After the Internet Tax Freedom Act 18 Project Design 21 Government Sources 21 Other Sources 21 Results 22 Conclusions 25 Recommendations 26 References 27 Introduction Electronic commerce is rapidly becoming a common way for individualsto transact business with companies located both locally and throughout theworld. Some analysts liken the controversy over how to tax Internettransactions to the debate which raged over how to tax mail order saleswhen they became popular in the 197 s and 198 s. California passed a moratorium on Internet sales taxes longbefore the federal government took the same measure; California also hasone of the most active Internet industries in the United States ("To Tax,"1998, n.p.). After hearings heldfor two and a half weeks, the bill was included in the OmnibusAppropriations bill approved by Congress on October 2 , and signed into lawon October 21, 1998. Instead,the report which will be presented will identify areas of disagreement andagreement among the members, and is expected to help codify areas whichneed to be addressed by any long-term legislative process (Shafroth, 1999,p. Thereport which will eventually be released will therefore identify thoseareas where there is agreement, highlight areas where there is disagreement(and the source of that disagreement), and make recommendations (again,these recommendations are not binding) regarding the steps which should betaken. In March 1998, Coxheld a news conference at which the National Governors' Association, theNational Conference of Mayors, the National Conference of StateLegislatures, the National Association of Counties and the National Leagueof Cities expressed their support for the legislation (Cox, 1999, p. The Aftermath of the Internet Tax Freedom Act Frank Shafroth addresses the implementation of the Act with particularattention to the Internet Tax Commission and the internationalramifications of the Act as it was implemented. The ITAA takes the position that electronic commerce is an integralpart of the global economy, providing more than 1.1 million jobs in 1996alone. Internet access (whichapplies exclusively to Internet Service Providers) provide Internet access,e-mail services, browser program providers and custom Web sites. Otherbusinesses which might be subject to taxation include informationaldatabases (requiring subscriptions), gambling sites (based where gaming islegal), stock trading sites and banking (Leslie, 1999, p. Up to this point,discussions have focused on ways to simplify the regulations regardingsales and use taxes, and on ways to enforce compliance which would notplace an undue burden on industry; critical to this latter requirement isthat companies not be subject to hundreds of audits based on each localgovernment's claim. The result of themany meetings, which brought together city, state and business leaders, isan agreement that no final report could be reached by consensus. Social and Political Implications of Internet Taxation States which have a high level of Internet industry within theirborders, such as California, have long favored generous taxation rulesregarding Internet transactions as a way to protect their Internetindustry. Certainly fundamental determinations will need to be made regardingwhich types of transactions, and which types of businesses, will be subjectto taxation when conducted on the Internet, and there is likely to becondsiderable debate regarding how (and by whom) these decisions are made.State and local governments have a stake in ensuring that taxation coversthe broadest possible categories; business (and those governments whereelectronic commerce is entrenched) are likely to protest stringent taxmeasures. Among the options that the National Tax Association project consideredwas having out-of-state or electronic sellers (this would possibly apply tomail order retailers as well as Internet retailers) collect a uniform stateand local sales/use tax. The Supreme Court has addressed the issue of tax nexus with regard toelectronic commerce. Hilson and Brooks lead efforts to makeelectronic commerce fair. At the 1999 annual convention ofthe National League of Cities, attendees expressed concern that themoratorium on Internet taxes would seriously impair the ability of localgovernments to collect taxes and provide the level of service thatresidents have come to expect. Whether considering taxing the ISPs astelecommunications utilities, having ISPs collect sales tax on behalf ofvendors who sell on the Internet, or whether taxing vendors directly,business and government are often at cross-purposes with regard to thisissue. The sales tax associated with this transaction would have been$1375, but Ohio did not collect this because the consumer purchased theitems from the Internet. Those individuals who are not able to afford thisaccess are not able to participate in the electronic commerce, and mustthen shop through traditional methods (at local suppliers) where they aresubject to sales tax. Industry and government had struggled to create taxlaws regarding mail order retailers in earlier decades; now thoseregulations were being applied to Internet transactions for lack of anyother. 1). Sales taxes are generally consideredregressive because the poor spend more of their income (proportionately)than the wealthy, and so pay a greater percentage of their income in salestaxes. From an international standpoint, the way in which taxation is handledby the United States will have far-reaching ramifications. 2). The ITAA argues that the Internet is adelivery medium and that ordering product over the Internet is no differentthan ordering a product over the telephone or through the mail (Cayo, n.d.,p. In 199 , the NSF network replaced ARPAnet andexpanded to include both government agencies and institutions of higherlearning. As business entered the world of electronic commerce, it became clearthat the current tax laws were insufficient to handle this new type ofbusiness transaction. (1998, May). At this point, the commission is far from being ready to releaseits final report, but it has agreed that it will not be able to reachconsensus on all of the issues associated with Internet taxation. Government agencies alsorecognize the potential of electronic commerce in the tax revenues whichsuch commerce represents. 9). 1). Conclusions At this point, various legislatures (including the federal Congress)recognize that Internat commerce carries with it considerable taxramifications. In return forimplementing this rather broad state tax measure, new federal, state andlocal taxes on Internet access would be prohibited (Orenstein, 1998, p.1 ). These analysts consider the ITAA's position that theInternet can remain tax-free unrealistic in today's environment. 2). The problem with this assertion is that many ISPs do not own theirservers and may not know the physical location of the server. The ITAA is not opposed to states receiving tax benefit from Internetactivity; it opposes the direct taxation of Internet transactions.According to the ITAA, Internet activity is already being taxed throughtelecommunications taxes which increase as increased numbers of peopleaccess the Internet using telecommunications facilities. From this standpoint, the lack of Internet taxationcan be considered regressive ("To Tax," 1998, n.p.). 6). 244. 1). Erickson, R. One ofthe arguments put forth by opponents of Internet taxation is that on-lineconsumers may be spared taxation, but they must still pay shipping andhandling costs. The Tax Adviser, p. Property taxes also decline as storefronts close, and payrolltaxes are lost as jobs are eliminated. This suit, brought by the NationalAssociated of Counties and the United States Conference of Mayors, holdsthat the Advisory Commission is biased and cites the appointment of GroberNorquist as evidence. ARPAnet wasdesigned to maintain a means of communication in the event of a nuclearattack. Retailers recognize the potential of electronic commerce andrespect the low overhead that it commands (by reducing the need for aphysical presence); consumers respond to the convenience and the often lowprices which are offered on the Internet. Tax laws were designed for a traditionalmanufacturing society where companies had clear physical presence in aparticular location; these laws are difficult to apply to electroniccommerce, and regulators have been slow to adopt taxation policies whichaddress the unique aspects of electronic commerce. Lastly, the Act addresses the global nature of the Internet andrecognizes that individual nations will want to retain control over howtaxation issues affect their businesses. In addition, if taxation rules are developedfor one nation which are considered particularly burdensome, electronicbusinesses may well choose to locate their companies in other regions.This would result in a loss of economic benefit which goes well beyondsales taxes. Representatitives from municipalities consider the members ofthe Advisory Commission on Electronic Commerce to favor electronic commerceover the concerns of local government, and a lawsuit has been filed toprevent the commission from meeting. The situation is made even more complicated by the fact thattaxation issues carry considerable international consequences, and nationsare unlikely to favor creating tax havens off-shore, nor do they want tounnecessarily burden their own industries. Over the course of the next severalyears, there are likely to be numerous changes in the way that Internettaxation is handled, and it is unlikely that the electronic commerceindustry's desire to remain tax-free is realistic. Nation'sCities Weekly, p. E-Commerce and taxes. This approach could result in an international electronictrade war where other countries impose similar tax strategies. Some critics of the Internet tax moratorium are of the opinionthat sales taxes are not intended to tax businesses, they are intended totax the purchaser. Cox, C. Tradition retailers (those with physical locations) areconcerned that Internet businesses receive special consideration becausethey are simply a new way of doing business, and that the lack of taxationon the Internet provides these businesses with a competitive advantage. The Act also created a commission which was designedto bring together business and industry leaders in order to create a reportwith specific recommendations (these would be non-binding on Congress).The commission appointed by Congress is composed primarily of electroniccommerce leaders and supporters (including a registered lobbyist forMicrosoft), and has been challenged in Court since it is clearly inviolation of the Act's own stipulations. The Republican governor of Utah, Michael Leavitt, has proposed an eventax system throughout the country which would redistributed the taxcollected for electronic commerce across the nation as a whole to localgovernments. 2). The members of ITAA have an interest in maintaininglow rates of taxation in order to keep their own cost structures minimizedand to keep demand from shifting if higher prices (through taxation) areimposed on consumers. The Right to sell tax-free. 2). This commission intends to create guidelines which do not favor anyone location or industry, and which are rendered competitively neutral bytheir implementation. 1 . This commission is charged with themost fundamental question: should electronic commerce be taxed? At this point, any user with a computer, a modemand software could dial a local telephone number (or a toll-free number) togain access to the Internet. The issue of Internet taxation also raise the social question ofregressive versus progressive taxation. Localgovernments are particularly concerned because most receive a percentage ofthe state sales tax, and any decrease in that sales tax represents asignificant loss to local communities. The agencyrelationship is important because the Supreme Court has held that when anagency relationship exists, companies create a tax "nexus" for themselvesin the states where such agents operate (a tax nexus is the minimum amountof connection which must exist within a particular jurisdiction beforetaxes can be levied). Leslie, L. In oneexample, an Ohio resident purchased approximately $25, in furniture onthe Internet and paid approximately $1 to have the items shipped to hishome. Aspart of this Act, there is a three year moratorium on new Internet taxes(including those which treat the ISPs as telecommunications utilities), andnew taxes cannot be enacted which do not meet certain strict conditionslaid down by the Act. Finally, a business publications search was conducted toinclude as many different points of view as possible. Los Angeles Times, n.p. As of mid-1998, nine states taxed Internet services as did numerouslocal governments. Telecommunications for the purposes of thisanalysis are held to be the transported between or among points specifiedwithout change int he form or content of the information involved.Internet access service is provided through the use of telecommunicationsfacilities, but ISPs do not provide transport of communications signals.Instead, the ISPs purchase the services from telecommunications companiesand provide the enhanced services which are not subject to taxation (Cayo,n.d., p. These taxation policies were based on the idea thatInternet tax revenues would greatly exceed those generated by catalog salesand mail order sales, and those transactions were subject to some type oftaxation. One company, Micron, has already taken thisroute and cited the moratorium as the reason it was closing storefrontoperations. (n.d.). 3). Regardless of the recommendations which may result from thecommission, legislators and business leaders are already looking beyond thethree-year window provided by the tax moratorium. Project Design The issue of taxing electronic commerce has received a great deal ofmedia attention in recent years as state and municipal governmentsrecognize that they have a considerable potential source of revenuecontained in the Internet. (1999, April 19). Other types of taxation, such astaxing the ISPs as telecommunications utilities, are considered to pose agreater barrier to continued Internet commerce and are likely to meet withgreater resistance by the Internet industry as well as the governmentrepresentatives which have large Internet company participation in theirregions (Orenstein, 1998, p. Bank Systems and Technology, p. The ITAA also holds that the actions taken by the United States withregard to tax issues, particularly state tax issues, will be monitored bythe rest of the world and have global implications. Only three appointees nominated by state or local governmentswere included on the commission. Jobs, payroll taxes and other economic benefits could bepermanently lost. 6). To tax or not to tax. By 1995, however, thatsituation had changed. 1. The following literature review summarizes the key points of thedebate surrounding the issue of Internet taxation; far more literature isavailable than can be included in this brief survey, but the primaryviewpoints available in the field are discussed. State and local governments, however, continued to maintain that salestaxes were not taxes on business, per se, but were instead taxes onconsumption. The goal ofthe "multiple" provision is to prevent several different states fromcollecting sales tax on the same electronic transaction. Other Sources The Internet itself provided a good source of information with regardto how the electronic commerce sector as a whole has responded to the issueof Internet taxation; global Internet issues were also covered throughInternet sources. F. Issues of taxation nearly always raise issues of whether the taxes are"fair" to all members of society, and the Internet taxation issue is nodifferent. Guidera, J. Some analysts believe that this type of Internet taxation would havethe least detrimental effect on Internet commerce since sales taxes arealready collected on retail sales and companies already have structures inplace to handle sales tax collections. 5). Digitized products can be delivered directly over the Web; theseinclude computer software, music products and magazine articles. Recommendations Continued monitoring of this issue is necessary as there is no clear-cut resolution available at this time. Governments suggest thatalthough the demands of Internet retailers are different from those oftraditional retailers, they still require roads, education, policeprotection and the other elements of civic infrastructure which taxationsupports ("E-Commerce," 1999, p. Government representatives were looking past the three-year moratoriumon Internet taxation even as the legislation was being passed. The result might well be, according tothe ITAA, participation in international tax disputes well beforeinternational tax agreements have been developed and implemented (Cayo,n.d., p. Vendors rarely own their own servers, but insteadcontract with ISPs to provide Web hosting services. At the same time, the National Tax Association project also consideredthe issue of whether ISPs should be considered telecommunications companiesfor the purposes of taxation. Plain English Summary of the Internet Tax FreedomAct. Some states have arguedthat the location of the computer server creates a tax nexus for the ISPsthat use the server and for any vendors whose Web sites are located on thatserver. Instead,the League maintains that taxation will have to change in order to adapt tothe new tax environment. If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.