TAXES ON E-COMMERCE

Supposedly, Prime Minister Gladstone once asked Michael Faraday "What is the use of electricity?" to which Faraday is said to have answered "Sir, some day you may come to put a tax on it." (Samuelson, Economics.) Today politicians have their eyes on online trading. 

When you buy a book at a bookstore, you usually pay a sales tax. If you buy the same book online, you seldom pay sales tax. However, if you do not pay the sales tax, you may be liable to pay a use tax instead. How often do you do that? 

In the case of the U.S., rules about sales tax are governed by the state, the municipalities and sometimes by local rules. There are close to 7,500 jurisdictions in the U.S. with different, and contra dictionary, rules. Anyone selling online is supposed to keep track of these rules. 

A seller who has permanent presence in the area, legally called nexus, and who sells tangible personal property, is liable to collect sales tax. But this is not clear cut. An agent, or a contract with a repair shop, can establish nexus. Not all tangible personal properties are subject to sales tax. Food, for example, is often exempt.

David E. Hardesty, CPA, Sales Tax and Electronic Commerce, 2003, offers a description of the rules in the U. S. For updates Click Here. For the rest of the world, see his "E-Commerce Taxation Around the World." 

In order to make it easier for online vendors, the Streamlined Sales Tax Project (SSTP) was started. It is supposed to simplify and unify sales and use tax legislation throughout the U.S. By the end of 2003 some 35 states may have joined the agreement. 

However, in 1998 the U.S. Congress pasted the Internet Tax Freedom Act (ITFA), which was supposed to eliminate sales and use taxes for online trade. It didn't, and besides, it is set to expire in November of 2003. 

While ITFA works against online taxation, the European Union has imposed value-added-taxes (VAT) on some online trade. See "Europa - Taxation and Customs Union: VAT and e-commerce" and Charles E. McLure, Jr., "Taxation of Electronic Commerce in the European Union," 

Other sources on taxation of e-commerce are: 
Electronic Commerce  
Asia Times: Internet: Taxing issues 
Asiaweek.com Taxers, Beware July 14, 2000 

STEPS in DETERMINING and HANDLING E-COMMERCE TAXES 

1.    Determine the locations of the buyer, seller and supplier. Note that the seller and supplier can be different entities. 

2.    Determine the jurisdiction for sales, use and/or value-added taxes under which the buyer, seller and/or supplier falls. 

3.    Does the seller have physical presence for tax purposes (also called nexus) at the location of sales? Strange things can establish nexus, such as agents, repair subcontractors, etc. Without nexus there is usually no tax liability. 

4.    Determine whether the product or service being sold is subject to sales, use, value-added or other transaction taxes. 

5.    Determine the tax rate, which varies with jurisdiction. For example, New York State has one sales tax, and in addition the City of New York has another. Sometimes there is no tax liability until the value of the sale reaches a threshold, in other cases there is a maximum or cap on the tax. And there are tax holidays. There are cases there two jurisdictions claim tax (double taxation), which can or can not be remedied by tax credits. 

6.    Calculate the tax. 

7.    Charge the tax to the buyer (or whoever has ultimate liability for the tax). 

8.    Transmit the tax to the proper entity with jurisdiction for the tax. 

As you see, being in compliance with laws for transaction taxes is not easy when you are engaged in e-commerce. Luckily there are computer programs to take care of the determinations and calculations for you. There are simple "look-up" programs there you can manually obtain the information. Such programs start at about U.S. $500. You can also obtain fully automatic programs that calculate the proper taxes, charge them to the buyer (or whoever) and transmit them to the tax authority. Such programs start at U.S. $15,000 and go up to millions for large multinational companies. 

Among such programs are: RIA InSource (www.riahome.com), Taxware (www.taxware.com), and Vertex (www.vertexinc.com) as listed by David E. Hardesty. 

Ask a question 
Form for requests and comments.

Top of this page

Last revised June 19, 2006.
ELN