A Taxing Thought after Tax Time<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
J. Michael Sharman
 
 
The U.S. Postal Service recently carried my payment, painfully made, to the U.S. Treasury for this year's income tax. We've been hearing for awhile about how the global economy is affecting our local factories and our neighbors' jobs. Now that April 15th  is past, it's a good time to ask the question: How is  the global Internet economy going to affect our state, local, and federal governments' ability to collect taxes?
 
A shipment of products used to mean that there might be some loss or leakage of the goods with the risk of loss being allocated between the buyer and the seller. Now these goods pose a new leakage problem – a tax leakage problem for the taxing authorities. The tax leakage problem is because of the lack of a clear audit trail, electronic invoicing, "e-money", and a general inability for tax authorities to do transaction-flow tracking.
 
The U.S. Congress had estimated global e-commerce sales of  $108 trillion in the year 2003. No one really knows how much government tax dollars that loses or where the losses occur. A news article the other day said Utah legislators just recently made a tax loss guesstimate for their state with a range of $200,000 to $250 million. Now that's the size of range that's suitable for wide open spaces.
 
There are two general categories of taxes: direct taxes and indirect taxes. Direct taxes are imposed upon the person, property, business, or income of the person who is to pay the tax. Indirect taxes are levied on commodities before they reach the consumer, and are paid by those upon whom the taxes fall, not as taxes, but as part of the market price of the commodity.     
 
Just as there are two kinds of taxation, there are two kinds of e-commerce, also called indirect and direct. Indirect e-commerce occurs by purchasing on-line a tangible item that must then be delivered physically by road, rail, ship or burro. Direct e-commerce, on the other hand, occurs when the purchase and delivery are both carried out online. With indirect e-commerce, you can order on-line a ledger book to be physically delivered to you later. With direct e-commerce, online you can order, pay, and instantly download a new bookkeeping system.
 
Indirect e-commerce raises fewer indirect tax issues than direct e-commerce. With indirect e-commerce the goods must pass through some type of port of entry or collection point where the tax authorities will be able to collect taxes or create an audit trail.  Direct e-commerce transactions, though, can also slip past without any taxing authority knowledge.
 
Some of the perplexed frustration about how to deal with the taxation problems caused by the Internet come out in the writings of international tax expert Silvia Sanusian of <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Argentina: "No geographical boundaries limit or hinder access to a Web site once the same has been placed on the Internet. … The fact is that cyberspace spreads beyond geographical boundaries. [I]t is no longer a question of struggling against double taxation -- as in the past -- rather, it's now a question of fighting nontaxation, through tax evasion and elusion, and the resort to tax havens."
 
We can now skip buying our ledger book at Wal-Mart by buying it on-line. We don't need to buy a physical ledger book at all if we just download the accounting system on-line. In fact, we can just connect our computer to the computer of an accountant in Jakarta, or Cape Town, or New Delhi, and he can do all our accounting at a fraction of our local accountant's price, which we can then pay to our foreign account online through an electronic bank transfer.
 
With all that e-commerce ease, we can avoid sales tax at every level and our foreign accountant can avoid paying income tax to our state, local or federal government for his accounting services.
 
Here's the taxing thought-even for someone who hates paying taxes as much as I-how will we support our state, local or federal services when all of us begin to do that?
 
"Watch your opportunity", said Diogenes Laeritus in the Third Century. Even way back then opportunity was known to contain the potential for danger.
Perhaps it is even more true today.
 
 
SOURCES:
"Talk of Internet sales tax returns" Salt lake Tribune, April 21, 2006.
H.Con. Res.190, 106th Cong., 1st Sess. (1999).
Black's Law Dictionary 1307 (5th ed. 1979).
Sanusian, Silvia R., "Taxation and E-Commerce: Preliminary Notes on the Notion of 'Permanent Establishment' from an Argentine Perspective", TNI-News, p.1848, Oct 23, 2000.
Mauro, Gregg "International Tax Policy and Planning: An E-Commerce Perspective", TNI-News, p. 1949, Oct 23, 2000.
Vincze, Jim; Schwartz, Randy, Canada keeps Apace With E-Commerce Taxation, TNI-News, p.767, Aug.14, 2000.
Sanusian, Silvia R., "Taxation and E-Commerce: Preliminary Notes on the Notion of 'Permanent Establishment' from an Argentine Perspective", TNI-News, p.1846-47, Oct 23, 2000.
Doernberg, Richard L., "Electronic Commerce: Changing Income Tax Treaty Principles a Bit?" TNI-News, p.2417, Nov 20, 2000.
Bartlett, Familiar Quotations: Passages, Phrases & Proverbs Traced to Their Sources  p. 758 (9th ed. 1903)