impacts

This page considers the impact of electronic commerce on national and international taxation regimes.

Prominent US lawyer Lawrence Lessig, in Code and Other Laws of Cyberspace (New York: Basic Books 1999), writes about libertarian forecasts of the withering of the state: "no government could survive without the Internet's riches, yet no government could control what went on there" and the everywhere-but-nowhere Web undermines traditional revenue collection mechanisms. 

As an article in the Economist pointed out, "buy a novel from your local Manhattan bookstore and you will pay a combined state and city sales tax of 8.25%. Purchase the same book over the Internet from Amazon and there will be no tax to pay." Nathan Newman's 1996 paper The Great Internet Tax Drain painted an alarming picture of the consequences for municipal and regional sales tax collectors in the US and EU.

Among recent publications we've noted William Craig's Taxation of E-Commerce (London: Tolley 00), In A World Without Borders: The Impact of Taxes on Internet Commerce, a paper for the May 2000 Quarterly Journal of Economics by Uni of Chicago economist Austan Goolsbee. It builds on his 1999 paper Evaluating The Costs & Benefits of Taxing Internet Commerce, co-authored with Jonathan Zittrain of Harvard Law School. 

As you'd expect, their advice is "just say no" to the byte tax and similar proposals, highlighted on the byte tax page of this guide. Hal Varian's short, characteristically cogent paper on Taxation of Electronic Commerce is available on the Internet Policy Institution site. 

Two bodies exploring Internet taxation and other issues are the US Advisory Commission on E-Commerce - a government agency - and the OECD's Taxation & Fiscal Affairs Section, which is monitoring developments at a national and international level. 

     US

The Advisory Commission was established under the 1998 Internet Tax Freedom Act and so far has served largely as a sounding board for the concerns of different interests and lobby groups such as NetCoalition.com, the Internet Tax Fairness Coalition (ITFC), the strangely named Global Information Infrastructure (GII), the E-Fairness Coalition (a "level playing field" for taxing retailers), the Internet Alliance ("premier organisation of policy professionals representing the Internet online industry") and the Global Business Dialogue for Electronic Commerce (GBDe). 

An overview of US developments is provided in the online briefing by the bipartisan Congressional Internet Caucus or in Public Policy and the Internet: Privacy, Taxes & Contract (Stanford: Hoover Institution Press 00) edited by Nicholas Imparato. The latter should be read in conjunction with The Internet Economy: Access, Taxes & Market Structure (Washington: Brookings Institution 00) by Alan Wiseman.

Jonathan Ricci's 1999 Richmond Journal of Law & Technology paper on the IRS versus International Cyberspace Transactions is a useful introduction to legal and technological challenges.

The US Treasury Department's November 1996 paper on Selected Tax Policy Implications of Global Electronic Commerce remains of value.

     OECD

The OECD has recently released its progress report on the development of a global e-commerce tax framework, including treatment of consumption taxes, payment for digitised products (eg music and software delivered online) and tax jurisdictions.

That document builds on agreement at the 1998 Ottawa OECD conference on ecommerce, with government endorsement of arguments in the Electronic Commerce: Taxation Framework report that existing taxation principles should apply to ecommerce (eg no 'byte taxes'), there should be no discriminatory taxation, consistent standards for cross-border taxation should be developed, consumption taxes should be imposed at the place of consumption, and digitised products should not be regarded as goods for consumption tax purposes.

In the first week of January 2001 the Organization for Economic Cooperation & Development (OECD) announced a consensus on how to tax e-commerce activities.

Its committee on fiscal affairs established a loose set of e-commerce tax rules for further discussion and development. Under the rules, when a user completes a transaction with an online firm located in another country, the vendor does not have to pay taxes to the user's nation. That exemption is valid when a third party hosts the vendor's site. Companies are subject to tax in nations that host servers if the server carries out business-critical activities. If the server only carries data that is processed somewhere else, the company is not liable for taxes.

On 12 February a subcommittee released recommendations on how governments can ensure that online transactions do not escape consumption taxes. Its report outlines objectives and proposes an international regime reflecting the jurisdiction and tax status of any online consumer.

Electronic Commerce and Multijurisdictional Taxation (New York: Kluwer 2001) by Richard Doernberg, Luc Hinnekens, Walter Hellerstein & Jinyan Li is of particular value and replaces the 1998 Electronic Commerce & International Taxation by Doernberg & Hinnekens.

     EU

In Europe the European Commission published a proposal during 2001 for a Directive to "establish a coherent legal framework for electronic commerce across the EU". 

The proposed Directive - basic legislation for all EU states - would complement the package of Legislative Proposals for a new Regulatory Framework for Electronic Communications, with directives on telecommunications privacy, access and interconnection among others.

     legal frameworks in Australia

The Australian Electronic Transactions Act 1999 (ETA) was perhaps the major achievement of the national government's 'strategic framework for the information economy' under the coordination of the National Office for the Information Economy (NOIE). The Attorney-General's Department has an e-Commerce Homepage, primarily concerned with the Electronic Transactions Act.

The Act reflects the 1998 Electronic Commerce: Building The Legal Framework report from the Electronic Commerce Expert Group, an advisory body. The report embraced electronic signatures, record keeping, contracts, the UNCITRAL model code for ecommerce, and other matters.

     and overseas

Information about the United Nations Commission on International Trade Law (UNCITRAL) is available on that body's website.  This site discusses the UNCITRAL arbitration regime, of particular importance, and the extensive literature on disputes. For a perspective on the negotiating process, the players and likely outcomes we recommend the excellent Global Business Regulation (Cambridge: Cambridge Uni Press 2000) by John Braithwaite & Peter Drahos. 

Another perspective on UN, OECD, WTO and other proposals comes in the controversial report from the American Bar Association's major cyberspace law project. The ABA has called for a global commission to set international rules regarding taxation, banking, consumer protection, privacy, gambling and other online activities.




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