Taxation and the Internet - U.s. E-tax Policies: Legal And Constitutional Dimensions, Arguments For And Against E-commerce Taxation

The commercial Internet, by the 21st century, had already substantially transformed business transactions, both in the United States and worldwide. In the early 21st century, similar changes were expected in the realm of taxation. Despite the financial downturn of the early 2000s and the collapse of many dot.com start-ups, projections for rapid growth and burgeoning e-commerce profits suggest that the financial stakes involved could be exceptionally high. Thus, the nature of taxation in e-commerce was the source of no small amount of debate.

The very nature of e-commerce complicates the issues surrounding taxation. The lack of physical connection between the parties in online transactions renders collection of taxes difficult. Many items sold online, such as music, videos, and software, can be downloaded directly from the Web, making the tracking of their dissemination problematic. Furthermore, such items are considered intangibles, which historically have been exempt from U.S. sales taxes. States usually tax income where it is earned, but the Internet often obscures the identity and location of individuals or businesses engaged in taxable activities. The development of anonymous e-currencies could facilitate tax evasion. Finally, the Internet aids the mobility of firms and workers, who can easily transfer to low-tax destinations or tax havens. Many large-scale, chain retailers have created independent, online businesses with a physical presence in just one state to avoid collecting sales taxes elsewhere.

Consistent data about the financial ramifications of e-commerce taxation are difficult to find. A University of Tennessee study estimated that states and localities could lose $10 billion in sales tax revenue to untaxed e-commerce by 2003. However, Forrester Research reported that in 1999 these jurisdictions experienced only $525 million in lost sales tax revenue. A University of Chicago economist concluded that if sales taxes were applied to e-commerce transactions, online purchasing could decrease by 24 percent.