Tax Challenges For Electronic-Commerce Activities

Abstract

Taxation of commercial transactions has always been a controversial and complex matter to administer for federal and state taxing authorities. Globalization of trade in the market-place, along with the emergence of new advanced technology, including the Internet, has imposed many new challenges for these taxing authorities because the systems in place were designed with a more simple business model in mind.

With the expansion of E-Commerce, state and local taxing authorities fear that their tax base will be eroded. Overall, only ten states have passed laws requiring online retailers to collect sales tax; however, the practices still vary amongst each state. Without a uniform e-commerce sales tax system, firms such as Amazon will continue to take advantage of the loopholes in the current system and will relocate production and sales activity to those tax-free states in order to avoid collection responsibility. For example, over the past year, the largest online retailer has challenged states that force it to collect sales tax through a lawsuit, a ballot initiative, and especially through one of politicians’ deepest fears—jobs. In South Carolina, Amazon won a four and a half-year exemption on collecting sales tax in exchange for a plan that creates 2,000 jobs and $125 million in capital investments to the state through the end of 2013.

One of the major problems is that lawmaking is usually a slow and tedious process. Technology, however, proceeds and evolves at unparalleled speeds. Any legal change to the current taxation system requires serious attention and consideration by governments and tax professionals. Therefore, this research will provide an overview of the problems raised by taxation of e-commerce, and arrive at some proposed initiatives that need to be undertaken to promote as much equity as possible for all parties, including the “Bricks and Mortar Merchants,” as well as the e-commerce businesses.