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debateCategory: (general)
Sunday, 2 October 2011
02:06:52 AM (GMT)
Why Internet Companies Generate Tax Issues
By Annette Nellen, CPA, Esq.
San José State University
January 2001
E-commerce represents a new business model. As such, it creates some challenges to
tax systems that
were designed with a different model in mind. Some of the key reasons why e-commerce
raises tax
issues include the following:
1. Location—Existing tax systems tend to determine tax consequences based on where
the taxpayer
is physically located. The e-commerce model enables businesses to operate with very
few physical
locations. Location factors primarily raise tax issues at the international and state
and local levels,
rather than at the federal level. For example, the U.S. Supreme Court has ruled that
a state may only
require a vendor to collect sales and use tax if the vendor has a physical presence
in the state.1
2. Nature of Products—E-commerce allows for some types of products, such as
newspapers and
music CDs, to be delivered in digitized (intangible) form, rather than in tangible
form. Digitized
products raise issues at the state level as to whether sales tax applies and in which
state income is
generated for state income tax purposes. It can also raise income tax issues
regarding the type of
revenue generated and how it is to be reported, as well as whether digitized products
are subject to
traditional inventory accounting rules.
3. New Marketing Techniques—The Internet has allowed for new ways of selling and
buying goods
and services. For example, individuals can offer their unwanted items to a worldwide
group of
potential buyers via auction sites, such as E-Bay. The Internet can also be used to
easily link
business buyers and sellers through exchange web sites where buyers post what they
have to sell
and sellers match up with them, or vice versa. Such sites can almost operate without
intervention for the matching function. In addition, the Internet has increased the
use of bartering,
most notably with respect to exchange of web banners that serve as advertisements.
These new
techniques raise various tax issues at all levels. For income tax purposes, issues
include whether an
exchange intermediary or broker should be accounting for inventory, and what amount
information reporting should be required for low-value bartering transactions. At the
level, the source of the income generated (which country) might be uncertain.
4. New Types of Assets—Some of the new assets created by commercial use of the
Internet are
domain names (URLs) and web sites. For income tax purposes, issues exist as to how to
treat the
costs of creating or acquiring such assets, as well as the characterization of any
gain or loss
generated upon disposition of the asset. Sellers of such assets may face uncertainty
in the law as to
how to characterize the gain or loss generated from the disposition (capital or
5. Making Optimal Use of the Internet May Challenge Old Rules—One area where use of
Internet has potentially raised some tax issues involve how some tax-exempt
organizations are
using the Internet. For example, a tax-exempt organization might allow donors to be
listed on the
organization’s Web site. This may cause the entity to face issues as to whether the
listing is merely
1 Quill, 504 U.S. 298 (1992).
an acknowledgement or whether it is advertising that may result in unrelated business
income (UBTI) for the organization. Another issue may exist where an organization
that primarily
operates on the web, such as a non-profit information exchange, meets the tax
definition of a taxexempt
organization. Also, the Internet may allow for more efficient interactions between a
organization and its donors, yet existing rules were not written with such
interactions in
mind. For example, a receipt is required for certain donations in order for the donor
to be entitled to
a deduction. Will a receipt generated by and printable from a Web site constitute an
acknowledgement for tax purposes? In October 2000, the Service issued Announcement
2000-42 I.R.B. 385, which lists various issues that tax-exempt organizations may face
related to the
Internet. The Service is seeking input from interested parties as to whether
additional guidance is
needed for tax-exempt organizations.
6. Nature of Transactions—The Internet allows for paperless transactions and the
potential for the
use of electronic cash. This raises administrative concerns for the Internal Revenue
Service as to
whether transactions were properly reported, whether an audit trail exists, and
whether new
reporting rules are needed. In a speech entitled, “Tax Administration in a Global
Era,” (former)
Treasury Secretary Summers stated:
“The Internet provides new ways for tax administrations, such as the IRS, to
the ease and transparency of tax collection. But new technology also raises certain
problems. In a world where cyber-transactions are growing at a rapid pace, tax
administrations face the challenge of adapting existing tax systems to an economy
increasingly ignores physical borders.
In such a world, it will be easier for companies to avoid tax collectors by
worldwide through web-sites based in jurisdictions that are unwilling to share
2 From a speech to the 34th General Assembly of the Inter-American Center of Tax
Administrators, released by Treasury on July
10, 2000, LS-759.

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