In part one of an overview of internet commerce, Joanna Mancey examines differing US and European approaches to taxation.
William Daley, US Secretary of Commerce, believes in a digital Hippocratic oath. In the global domain of the internet, he says, the overriding tenet is Do no harm. Last month, Daley was in Bonn, trying to convince European government and business officials to adopt this principle at a conference to help thrash out the European policy for managing electronic commerce on the internet. The internet, he stated, Will not be and should not be a government run marketplace. Those rules now on the books that hinder electronic commerce should be revised and eliminated, he advised. This is unsurprising, US companies dominate the internet and clearly have the most to gain from any explosion in internet commerce. And, according to the market analysts, provided governments don’t stifle internet commerce, an explosion is coming. IDC forecasts that electronic commerce should soar from less than $1bn to $150bn by the Year 2000. But the global nature of the internet means that there are many potential barriers to growth and multiple opportunities for conflict. Although European and US governments appear to agree on how to govern electronic commerce, there are still critical policy differences both at a national and international level on how internet commerce should be commercially regulated. For governments the internet is as much a threat as it is an opportunity. They fear its development could seriously upset trade balances, wreck fiscal policies and erode the power of the nation state.
The taxman cometh
For companies looking to exploit the internet as a business medium, it is also clear the issues are far from resolved. Taxation is set to become a major battleground. Governments fear they will lose control over tax collection as businesses disappear into cyberspace. Companies fear the introduction of punitive taxation policies that will stifle online trade. Two key internet specific taxes have been proposed so far. A ‘bit tax’, based on the number of bits of data delivered to a customer over the Internet, and a form of ‘public broadcaster’ fixed tax on internet-enabled PCs. This summer the US framework for global electronic commerce and the European declaration on electronic commerce ruled out the creation of internet specific taxes. But while support for these taxes is low at an international level, at the national and local level there is growing enthusiasm. European Commission researchers discovered that deploying a bit tax of one cent per megabit of data transmitted across the Internet would generate an extra $10bn in tax revenue in Belgium alone. In the US, where internet activity is markedly higher, the sums could be enormous. If it proved practical to collect, it could become an appetizing cash cow, say officials. In the US, Senator Ron Wyden of Oregon is trying to push through legislation that will place a moratorium on state and local internet taxes, directing the federal administration to develop policy recommendations on interstate taxation of electronic commerce. But the bill could be thrown out. Lawyers say it may encroach on the jurisdiction of state and local governments. Numerous state governments have argued that, if the bill goes through, it will rob them of millions of dollars of legitimate taxes by exempting sales tax on credit card purchases. The State of Texas claims that it could lose close to $1bn a year in taxes if the bill is agreed. The tax laws governing interstate business are unruly. Generally, inter-state commerce in the US has not been taxed unless the vendor has had a significant sales or physical presence in the buyer’s state. Mail-order firms have profited from this situation, nominally locating in lenient tax states and selling throughout the country. Electronic commerce companies which were thinking of doing the same, may now have to think again. Most US state governments now argue that the physical network server which receives the purchase contains the actual transaction. Therefore, the state where the server is located is also the state that collects the income tax. This suggests that companies may put all their servers offshore. However, any local access point may be considered a nexus link. The state of Texas has decided that a web page based on a server located anywhere in the state constitutes a nexus. In Connecticut, the presence of an access modem constitutes a nexus. A major concern is whether an ISP hosting electronic services could also be considered a nexus.