Lecture 11:
Tax and Antitrust
45-848 ECOMMERCE LEGAL ENVIRONMENT
SPRING 2004
COPYRIGHT © 2004 MICHAEL I. SHAMOS
Purpose of Taxes
• Raise revenue
• Implement policy
• Political implications
– Politicians want taxes
– But: don’t want their citizens to pay them
– Favor “invisible” taxes (not paid by their voters)
• Over 20,000 taxing jurisdictions in the U.S.
45-848 ECOMMERCE LEGAL ENVIRONMENT
SPRING 2004
COPYRIGHT © 2004 MICHAEL I. SHAMOS
Legal Authority for Taxes
• “Congress shall have Power To lay and collect Taxes, Duties,
Imposts and Excises, to pay the Debts and provide for the
common Defence and general Welfare of the United States; but
all Duties, Imposts and Excises shall be uniform throughout the
United States.” U.S. Const., Art. 1 §8, clause 1.
• “No Tax or Duty shall be laid on Articles exported from any
State.” U.S. Const., Art. 1 §9, clause 5.
• “No State shall, without the Consent of the Congress, lay any
Imposts or Duties on Imports or Exports” U.S. Const., Art. 1
§10, clause 2.
• “Congress shall have power to lay and collect taxes on incomes,
from whatever source derived, without apportionment among the
several States, and without regard to any census or
enumeration.” U.S. Const., Amendment 16.
45-848 ECOMMERCE LEGAL ENVIRONMENT
SPRING 2004
COPYRIGHT © 2004 MICHAEL I. SHAMOS
Use Tax Example
• “an excise tax is hereby levied on the storage, use, or
other consumption in this state of tangible personal
property or the benefit realized in this state of any
service provided.” Ohio Rev. Code §5741.02
• “Tangible personal property or services rendered
upon which taxes have been paid to another
jurisdiction [shall be reduced by] the amount of the
tax paid to such other jurisdiction.”
45-848 ECOMMERCE LEGAL ENVIRONMENT
SPRING 2004
COPYRIGHT © 2004 MICHAEL I. SHAMOS
Collection of Tax
• National Bellas Hess, Inc. v. Dep’t of Revenue of Illinois,
386 U.S. 753 (1967)
• Hess was a mail order house in Missouri and Delaware. It
sold significant amounts of goods to consumers in Illinois.
• Illinois ruled that Hess had to collect use taxes for Illinois
• Supreme Court: “If Illinois can impose such burdens, so
can every other State, and so, indeed, can every
municipality, every school district, and every other political
subdivision throughout the Nation with power to impose
sales and use taxes.”
• One state cannot force another to collect its taxes
45-848 ECOMMERCE LEGAL ENVIRONMENT
SPRING 2004
COPYRIGHT © 2004 MICHAEL I. SHAMOS
Collection of Tax
• Quill Corp. v. North Dakota Tax Comm’r, 504 U.S. 298 (1992)
• Quill had presence in Delaware, Illinois, California, and
Georgia
• North Dakota required Quill to collect use taxes for North
Dakota
• North Dakota Supreme Court found Hess to be obsolete
based on “remarkable growth of the mail order business”
• U.S. Supreme Court: Commerce Clause is more than an
affirmative grant of power; it has a negative sweep as well.
The clause ... prohibits certain state actions that interfere with
interstate commerce
• North Dakota cannot force Quill to collect the tax
45-848 ECOMMERCE LEGAL ENVIRONMENT
SPRING 2004
COPYRIGHT © 2004 MICHAEL I. SHAMOS
Collection of Tax
• No State … shall have power to impose … a net income
tax on the income derived within such State by any person
from interstate commerce if the only business activities
within such State … are …
• (1) the solicitation of orders … in such State for sales of
tangible personal property, which orders are sent outside
the State for approval or rejection, and, if approved, are
filled by shipment or delivery from a point outside the
State …
15 U.S.C. §381
• One state can’t tax a foreign corporation’s income from
sales on orders solicited in that state
45-848 ECOMMERCE LEGAL ENVIRONMENT
SPRING 2004
COPYRIGHT © 2004 MICHAEL I. SHAMOS
Who Has the Right to Tax in
Cyberspace?
• A tax is valid only if the activity taxed has a “substantial
nexus” to the taxing state. (Due process.)
• State must have jurisdiction over the transaction and the
taxpayer
• Can Pennsylvania tax an amazon.com transaction with a
Pennsylvania consumer?
– Can it force the consumer to pay use tax?
– Can it force amazon.com to collect the use tax?
45-848 ECOMMERCE LEGAL ENVIRONMENT
SPRING 2004
COPYRIGHT © 2004 MICHAEL I. SHAMOS
Eroding Tax Base
• Ecommerce transactions generate little tax
– Many are interstate
– More electronic goods
– Many are unmonitored, unaudited
– Underground economy: barter, auctions
• Total tax base is eroding
• Proposed solutions:
– Value-added tax
– Communications (bit) tax
– National sales tax
45-848 ECOMMERCE LEGAL ENVIRONMENT
SPRING 2004
COPYRIGHT © 2004 MICHAEL I. SHAMOS
Tax Definitions
• Bit tax. Tax on electronic commerce measured by the volume of
digital information transmitted electronically.
• Capitation. A tax imposed on an individual without regard to
goods, services or income
• Duty. Usually, a tax imposed on imports into a country
• Excise. A tax based on the value of services or property other
than real estate, levied on the home market.
• Goods and services tax (GST). VAT on goods and services
• Impost. Old word for a tax, now usually an import duty.
• Sales tax. Tax on sales collected for the gov’t by a merchant
• Tariff. Tax on the value of imported goods.
• Use tax. Tax on the privilege of using goods within a jurisdiction
• Value-added tax (VAT). Indirect tax on consumption assessed
on the increased value of goods at each point in the chain of
production and distribution. Collected from the end user.
45-848 ECOMMERCE LEGAL ENVIRONMENT
SPRING 2004
COPYRIGHT © 2004 MICHAEL I. SHAMOS
Taxation
• Tax law deals with services (rendered by physical
people) and physical goods. When goods are
electronic, problems arise.
TAX STATUS BY NUMBER OF STATES
Tax
No Tax
Not Clear
Internet Access
16
29
1
Sales of Goods
44
0
2
Downloaded Sales
24
18
4
(No sales tax in New Hampshire, Oregon, Massachusetts, Alaska,
and Delaware)
45-848 ECOMMERCE LEGAL ENVIRONMENT
SPRING 2004
COPYRIGHT © 2004 MICHAEL I. SHAMOS
Value Added Tax (VAT)
• Fixed tax imposed at each stage of production of
goods.
• The total tax is built into the cost of goods
• Exports are not taxed. All imports are taxed.
• No tax forms or tax returns for individuals. Eliminate
the need for the IRS.
• Cost of compliance estimated at $5 billion per year,
about a hundred times less than the current system.
45-848 ECOMMERCE LEGAL ENVIRONMENT
SPRING 2004
COPYRIGHT © 2004 MICHAEL I. SHAMOS
VAT Example (17.5% in UK)
Transaction
Input
VAT
1. Forrester sells
timber
Price
w/o VAT
Output
VAT
Total
Price
Net VAT
Payable
0
1000
175
1175
175
2. Pulp factory
makes pulp
175
3000
525
3525
350
3. Paper factory buys
pulp, makes paper
525
6000
1050
7050
525
4. Wholesaler buys
bulk paper
1050
8000
1400
9400
350
5. Retailer sells
paper to consumer
1400
12000
2100
14100
700
= 525-175
45-848 ECOMMERCE LEGAL ENVIRONMENT
= 2100-1400
SPRING 2004
COPYRIGHT © 2004 MICHAEL I. SHAMOS
Internet Tax Freedom Act
• Moratorium from Oct. 1, 1998 - Sept. 30, 2001 on
– New taxes on Internet access
– Multiple or discriminatory taxes on Ecommerce
– Exception for material “harmful to minors”
• Extended through Nov. 1, 2003
• Now expired. Bills to continue it are pending
• EU is considering a bit tax. UN: 1 cent for 100 emails
45-848 ECOMMERCE LEGAL ENVIRONMENT
SPRING 2004
COPYRIGHT © 2004 MICHAEL I. SHAMOS
Antitrust Law
• Protect consumers by inhibiting use of monopoly
power
• What’s wrong with monopolies?
– Unchecked prices. Without competition, no
pressure to keep prices low
– No incentive to invest in R&D, improvement
– Lack of consumer choice
45-848 ECOMMERCE LEGAL ENVIRONMENT
SPRING 2004
COPYRIGHT © 2004 MICHAEL I. SHAMOS
Sherman Act (1890)
• “Every contract, combination in the form of trust or
otherwise, or conspiracy, in restraint of trade or commerce
among the several States, or with foreign nations, is
declared to be illegal.” 15 U.S.C. §1. Fine: $10 million + 3
years
• Every person who shall monopolize, or attempt to
monopolize, or combine or conspire with any other person
or persons, to monopolize any part of the trade or
commerce among the several States, or with foreign
nations, shall be deemed guilty of a felony. 15 U.S.C. §2.
Fine: $10 million + 3 years
45-848 ECOMMERCE LEGAL ENVIRONMENT
SPRING 2004
COPYRIGHT © 2004 MICHAEL I. SHAMOS
Sherman Act (1890) Prohibits









Price fixing
Advertising agreements
Bid rigging
Market allocation by competitors – exclusive territories
Market tampering – illegal agreements that affect
market behavior
Coordinated use of information – collusion, costs
Output planning
Collective exclusionary activity – boycotts,
concerted refusal to deal, e.g. agreement not to sell to
price-cutters
All are illegal regardless of purpose or effect
45-848 ECOMMERCE LEGAL ENVIRONMENT
SPRING 2004
COPYRIGHT © 2004 MICHAEL I. SHAMOS
Clayton Act (1914)
• Outlaws kickbacks (payments must be for services)
• Can’t discriminate in price against purchaser of a
commodity bought for resale (to further a monopoly)
• Can’t sell at low prices to harm or destroy a
competitor
• Can’t sell on condition that buyer not buy products of
a competitor
• Can make “due allowance for differences in the cost
of manufacture, sale, or delivery.”
15 U.S.C. §12
45-848 ECOMMERCE LEGAL ENVIRONMENT
SPRING 2004
COPYRIGHT © 2004 MICHAEL I. SHAMOS
Clayton Act (1914)
• “Whenever the United States is hereafter injured in its
business or property by reason of anything forbidden
in the antitrust laws it may sue therefor in the United
States district court for the district in which the
defendant resides ... and shall recover threefold the
damages by it sustained and the cost of suit.” 15
U.S.C. §15a.
• Allows action by state attorneys general
45-848 ECOMMERCE LEGAL ENVIRONMENT
SPRING 2004
COPYRIGHT © 2004 MICHAEL I. SHAMOS
Collaboration Among Competitors



Permitted if the “rule of reason” is satisfied
Antitrust conduct which is not a per se offense is
judged by the reasonableness of the activity.
When otherwise unlawful action is found, if the action
is ancillary to some lawful activity, and its
procompetitive consequences outweigh its
anticompetitive effects, it will be allowed.
Examples:


Combination of capital, technology or assets to achieve a
result not available to any single party
Efficiency-enhancing integration
45-848 ECOMMERCE LEGAL ENVIRONMENT
SPRING 2004
COPYRIGHT © 2004 MICHAEL I. SHAMOS
B2B Exchanges


Permitted if the “rule of reason” is satisfied
Potential anticompetitive harm: Increased ability to




raise prices
lower output, quality, service or innovation
collude through exchange of data
Monopoly or monopsony (combination to reduce
prices) risk
45-848 ECOMMERCE LEGAL ENVIRONMENT
SPRING 2004
COPYRIGHT © 2004 MICHAEL I. SHAMOS
Safety Zone



Agreements not challenged if:
Not facially anticompetitive
Meet ONE of these criteria:



Parties occupy less than 20% of the market
Three or more independent entities exist with assets, skills
and incentive to develop a close substitute
In licensing arrangements, four or more independently
controlled technologies exist that could be substituted
45-848 ECOMMERCE LEGAL ENVIRONMENT
SPRING 2004
COPYRIGHT © 2004 MICHAEL I. SHAMOS
U.S. v. Microsoft
• The offense of “monopoly power” requires two elements:
(1) the possession of monopoly power in the relevant market;
and
(2) the willful acquisition or maintenance of that power as
distinguished from growth or development as a consequence
of a superior product, business acumen, or historic accident.
• Monopoly power: can consumers turn to other suppliers? In
the Intel-compatible O/S market, no.
• Is Microsoft’s conduct “exclusionary”? (Has it restricted
significantly the ability of other firms to compete in the
relevant market on the merits of what they offer customers?)
45-848 ECOMMERCE LEGAL ENVIRONMENT
SPRING 2004
COPYRIGHT © 2004 MICHAEL I. SHAMOS
U.S. v. Microsoft (Tying)
• Tying:
(1) two separate "products" are involved;
(2) the defendant affords its customers no choice but to take the
tied product in order to obtain the tying product;
(3) the arrangement affects a substantial volume of interstate
commerce; and
(4) the defendant has “market power” in the tying product market.
(Have to take Windows Explorer to get Windows)
• Microsoft says: OS + browser are one integrated product
• “commercial reality is that consumers today perceive operating
systems and browsers as separate products, for which there is
separate demand.
45-848 ECOMMERCE LEGAL ENVIRONMENT
SPRING 2004
COPYRIGHT © 2004 MICHAEL I. SHAMOS
U.S. v. Microsoft
• OEMs
(1) Microsoft bound IE to Windows with contractual and
technological shackles to ensure the prominent (and
ultimately permanent) presence of IE on every Windows
user's PC system, and to increase the costs of installing and
using Navigator;
(2) Microsoft imposed limits on the freedom of OEMs to
reconfigure or modify Windows 95 and Windows 98 in ways
that might generate usage for Navigator;
(3) Microsoft used incentives and threats to induce OEMs to
design their distributional, promotional and technical efforts to
favor IE over Navigator
45-848 ECOMMERCE LEGAL ENVIRONMENT
SPRING 2004
COPYRIGHT © 2004 MICHAEL I. SHAMOS
U.S. v. Microsoft
• Internet Access Providers (IAPs)
(1) Microsoft licensed Internet Explorer and the Internet Explorer
Access Kit to hundreds of IAPs for no charge;
(2) Microsoft gave payments and rebates to IAPs that upgraded
existing subscribers to software that came bundled with Internet
Explorer instead of Navigator
• Java
Microsoft maximized the difficulty with which applications written in
Java could be ported from Windows to other platforms
• Exclusive dealing arrangements
Microsoft required dealers to promote and distribute Internet
Explorer to the exclusion of Navigator in return for payments and
technical support
45-848 ECOMMERCE LEGAL ENVIRONMENT
SPRING 2004
COPYRIGHT © 2004 MICHAEL I. SHAMOS
Q&A
45-848 ECOMMERCE LEGAL ENVIRONMENT
SPRING 2004
COPYRIGHT © 2004 MICHAEL I. SHAMOS