To Tax or Not to Tax
The state taxation of electronic commerce is in its infancy, and there are many unresolved issues and statutory and regulatory ambiguities. There are already stark differences in approaches taken by various states, and this is creating considerable confusion and a lack of uniformity in state tax rules. Yet if a cohesive system of taxation is to be created, now is the time. Already, many states, including New York, Massachusetts, and Florida, are in the process of reassessing their approaches to the taxation of electronic commerce. The federal government has also recently issued a white paper on Internet commerce.
But finding answers won’t be easy. States are caught between two conflicting forces–one to proceed cautiously so as not to adversely impact Internet commerce; and the other to take advantage of the revenue stream that cybertaxation could provide. Considering that sales taxes provide the bulk of state revenues in a majority of states, the outcome of this struggle could have enormous implications.
In some ways, electronic commerce would appear to be a prime candidate for state tax uniformity efforts. There is wide recognition among both states and business (a rare combination) that the state tax rules on electronic commerce are outdated, inconsistent, and potentially detrimental to industry. Consider the following: 70 percent of financial and tax executives believe that state and local tax rules governing electronic commerce are ambiguous; 50 percent believe this ambiguity is inhibiting their utilization of the Internet.
What Does the Future Hold?
The commercialization and taxation of the Internet and other forms of electronic commerce will be dynamic and chaotic over the next decade. Some states will impose far-reaching nexus rules, while others will adhere more closely to traditional “physical presence” standards. Some states will tax a full range of transmission and content-related Internet activities, while other states will limit their sales tax base to largely tangible personal property transactions. Moreover, there undoubtedly will be substantial litigation regarding issues such as what types of electronic commerce transactions are subject to tax, and what activities will create nexus in a state.
The debate over the state of taxation of cyberspace promises to be one of the defining state policy issues of the next decade. With over 6500 state and local sales tax jurisdictions in the US and Canada alone, complying with existing rules is already a major administrative task. And with new technologies and borderless and “real time” transactions associated with electronic commerce, these tax compliance responsibilities will undoubtedly become even more onerous. – ###
Provided by Arthur Andersen