The Difficult Issue of Taxing Internet Commerce

With issues of taxation there is again tension between the cyberworld and the world of states and localities, some of which rely on sales and use taxes for up to 50 percent of their revenues. The Supreme Court has ruled that the traditional remote sellers, such as the major catalog companies, are not required to collect taxes for states in which they do not have a significant physical presence.

This situation virtually mirrors that of the Internet. How will the sales and use tax tensions be resolved? Is there a technical means of collecting taxes that does not place a great burden on the merchant? How can Internet companies satisfy the 6,000+ distinct localities that have jurisdiction to impose different kinds and rates of taxes? In New York State, for example, there is a different tax level for “big marshmallows” than for “small marshmallows.”

Nor is the tax problem confined to the United States. The European Union (EU) works on a value-added-tax (VAT) system, and it has proposed to levy VAT taxes on digitally delivered goods from outside the EU. Their argument is that when a German firm sells digitally delivered goods to the Netherlands, it has to pay the VAT; if a firm sells the same goods to the Netherlands from Utah, it pays no VAT and receives a competitive advantage.

Interoperability Among Systems of Different Jurisdictions

Instances of discrimination are common in the physical world; for example, books and newspapers have different tax rates. However, a broader tension is how to find a process that looks at these questions in a global context and at least allows, in the telephone metaphor, “interoperability” among different systems. It does not seem likely, he said, that different jurisdictions will ever have the same policies. Each has different legal systems, different histories, and different customs.

Digital signature laws present a troubling precedent: Utah has a different rule from Michigan, which has a different rule from New York, which has a different rule from California. How can we do electronic contracts? Tariffs raise the same questions. Imagine trying to define an Internet consumer space: I have a company in California, I have a server in France, I sell a digitally delivered good to someone ordering from Hungary who wants to take delivery in Bangalore—and then it doesn’t work. Who makes the rules about that transaction? Who interprets the rules and enforces them? Countries have never had to examine such questions. There are many “choice of laws” and “conflict of laws” precedents, but they usually concern admiralty cases involving large physical ships.

He cited the example of restrictions at the state level on sales of automobiles over the Web. Local auto dealers argue to state governments that they are customers and constituents of the state and it would be unfair to let them fall prey to larger national companies. There are now state rules that prohibit national com-

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