Taxing E-Commerce in a Global Economy:
Old Issues, New Media, New Opportunities
presentation to
Advisory Commission on Electronic Commerce
by
Peter R. Merrill
PricewaterhouseCoopers LLP
Williamsburg, VA
June 22, 1999
2
Contents
 What
is e-commerce?
 A brief
history of e-commerce
 Some
facts and figures
 Tax
policy implications
 Suggested
principles to guide tax policy
3
What is e-commerce?
A broad definition
 Interactions
possessing three attributes:
(1) between two computer applications,
(2) completes all or part of business transaction, and
(3) crosses enterprise boundaries.
 Includes
business applications over VANs that
have been used for decades

Electronic data interchange (EDI)
Credit card and debit card transactions

Electronic fund transfers (EFT)

4
What is e-commerce?
A narrower definition (i-commerce)
 Limited
to business applications over open
networks using non-proprietary protocols
such as the Internet
 Defined
narrowly, e-commerce is barely four
years old!
 Includes
b2b applications over open
networks as well as b2c applications
5
What is e-commerce?
 Business-to-consumer









(b2c) examples
Retail -- catalogue, configuration, sale, payment
Broker, agent -- auction, travel, auto, real estate
Entertainment -- gaming, gambling, music
Communications -- e-mail, e-cards, net radio
Financial services -- securities, insur., banking
Publication -- newspapers, magazines
Database -- directories, maps
Professional services -- “tele-medicine”
Education -- “distance learning”
6
History of e-commerce
Source: OECD, The Economic and Social Impact of Electronic Commerce, 1999.
7
History of e-commerce
 E-commerce
is more a way of doing
business than a sector
 “In
five years, there won’t be any Internet
companies because they will all be Internet
companies. Otherwise, they will die.”
-- Andy Grove, Intel
 Prior
changes in communications
technologies also have led to evolution of
business models

telegraph, telephone, radio, TV, facsimile, etc.
Facts and figures
U.S. i-commerce sales
B2c gets the headlines, b2b gets the dollars
 b2b

accounts for 85%+ of sales in 1999
Much higher if we count EDI, EFT, etc.
 b2b
is projected to grow much faster,
reaching over 90% of i-commerce by 2001

b2b migration from VANs to the Internet permits
cost effective use by smaller enterprises
(“EDI lite”)
Source: Forrester Research Inc., Nov. 1998
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9
Facts and figures
b2c is a small share of Internet commerce
US Internet Commerce, 1998-2003
100%
90%
84%
86%
88%
92%
91%
92%
80%
70%
60%
US b2c
US b2b
50%
40%
30%
20%
16%
14%
12%
10%
9%
8%
8%
0%
1998
1999
2000
2001
Source: Forrester Research, Inc. (Nov. 1998)
2002
2003
Facts and figures
US direct market sales to consumers
E-commerce is a tiny share of direct market
sales


Internet sales to consumers are less than 3%
of all direct market sales to consumers (est.
1999)
Internet sales to consumers amount to less
than 4/10 of one percent of U.S. personal
consumer expenditures (est. 1999)
10
Facts and figures
Internet is a tiny % of direct market consumer sales
Value of U.S. Direct Market Driven Consumer Sales, 1998-99
800
674.0
700
612.2
Billions of dollars
600
500
Internet
Total
400
300
200
100
18
8
0
1998
1999
Sources: Direct Marketing Assoc. and Forrester Research, Inc.
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12
Facts and figures
To date, Internet companies have small profits
Combined total from most recent financial
statements of 15 large Internet companies:*
Revenues
$5.1 billion
Net income
$-0.4 billion
*Amazon, AOL, CDnow, CompuServe, E*Trade, eBay, Excite,
Infoseek, Lycos, N2K, NetGrocer, ONsale, PeaPod, Preview, Yahoo!
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Facts and figures
International revenues are significant for some
U.S. firms
Company
Segment
CDnow
Music Boulevard
Amazon
FirstParts
Virtual Dreams
Music
Music
Books
Components
Adult entertain.
Int’l revenue (%)
Source: OECD, The Economic and Social Impact of Electronic Commerce, 1999, p. 100.
35%
33%
26%
30%
25%
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Facts and figures
 U.S.
dominance of global e-commerce
market is projected to decline

Mid-range estimates put U.S. share of global
i-commerce sales at
about
80% in 1999
declining to less than 60% in 2003.
Source Forrester Research Inc., 1998
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Facts and figures
I-commerce Sales: U.S. as a percent of Global, 1998-2003
100%
90%
80%
70%
60%
High
Low
Middle
50%
40%
30%
20%
10%
0%
1998
1999
2000
2001
Source: Forrester Research, Inc., Nov. 1998
2002
2003
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Facts and figures
 E-commerce
is contributing to U.S.
economic growth by raising productivity


Improved supply chain management and
reduced inventory costs
Reduced distribution, marketing, and customer
service costs
 The
OECD estimates b2c commerce
potentially will increase total U.S. factor
productivity by 0.50%-0.67%
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Tax policy implications
 Don’t
let advocates of radical tax change
use e-commerce as a pretext.



Remote sales have been with us since at least
the Sears & Roebuck catalog
The Internet is a tiny share of remote sales, and
a negligible percentage of all consumer sales
Excluding services (which generally are not
subject to retail sales tax), most b2c Internet
sales are delivered exactly like mail order
18
Tax policy implications
 The
tax system can cope with e-commerce.
Though the medium is new, the issues are old.
See Howley v. Whipple, 48 N.H. 487 (1869) in which
the court opined that writing and signatures
communicated electronically through the telegraph
were equivalent to pen and ink.1
1See:
Boyle, Peterson, Sample, Schottenstein, and Sprague, “The Emerging International Tax
Environment for Electronic Commerce,” Tax Management Memorandum, February 18, 1999.
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Tax policy implications
 Currently,
tax revenue losses due to
e-commerce (if any) are very small

Goolsbee and Zittrain (1999) estimate that sales
tax revenues are reduced by less than 1/4 of 1
percent in 1998
Less

if Internet substitutes for mail order
This does does not take into account offsetting
revenue gains due to
Productivity
growth from business efficiency gains
Stock market gains spurred by e-commerce

Potential revenue loss from direct taxes also is
minimal due to current absence of profits.
20
Tax policy implications
 E-commerce
highlights a number of
anomalies and weaknesses in tax systems


Federal and state telecommunications taxes
have become outdated due to deregulation and
convergence of technologies
The current system is too complex
30,000


potential sales tax jurisdictions in US!
Forexia case (UK VAT). Delivery of a newsletter
as a hard copy vs. e-mail or fax.
Jurisdictions must coordinate to avoid doubletaxation of border-crossing transactions
21
Tax policy implications
 Market-driven
technological developments
will provide tools for assuring tax compliance

“Many software manufacturers and e-business
merchants would like to be able to identify
clients uniquely.”1

Tax administration should follow, not lead,
technological development of e-commerce.

Business participation in development of tax
standards is essential.
1PricewaterhouseCoopers,
E-business Technology Forecast, 1999, p. 192.
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Tax policy implications
 E-commerce
technology has the potential to
dramatically lower costs of business to tax
administrator (b2a) transactions



Electronic tax registration
Electronic tax filing and payment
Dissemination of tax information on government
web sites
23
Tax policy implications
 Tax
administrators’ fears that electronic
records are more easily altered are without
foundation.


For commercial reasons, firms must ensure the
security and integrity of their electronic
transactions and records
Sophisticated auditing procedures are being
developed for use by internal and external
auditors, who must satisfy themselves of the
integrity of electronic systems and records.1
1 PricewaterhouseCoopers,
“The Technologies of Electronic Commerce: The Integrity of Electronic
Transactions and Digital Records for Tax Administration and Compliance,” prepared for the Electronic
Commerce Tax Study Group (August 1998).
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Tax policy implications
 Tax
authorities should not discourage new
technology to protect familiar ways of doing
business.

Such measures will reduce potential productivity
and national income gains.
 U.S.
and foreign tax authorities should
recognize that U.S. dominance of
e-commerce is transient.


Discriminatory application of VAT and other
taxes will slow efficiency gains.
OECD is seeking to build consensus among
member states and developing countries.
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Tax policy implications
 Neutral
application of tax rules and
government regulation is critical


Convergence of technologies is causing
companies to cross industry boundaries (e.g.,
broadcasting over the web)
Some products can be supplied in tangible or
intangible form (“digital goods”), but government
regulations may treat these differently
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Principles to guide tax policy
 Commission’s
deliberations should be
guided by four basic tax policy principles:
1. Neutrality
2. Simplicity
3. Free trade
4. Technological efficiency
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Principles to guide tax policy
1. Neutrality

E-commerce should not be taxed at a higher
rate than economically similar transactions
conducted through traditional methods.
As
a corollary, E-commerce transactions should not be
subject to special taxes that don’t apply generally.


E-commerce should not be held to a higher (and
more expensive) standard of compliance than
traditional forms of commerce.
Tax administrators should respect the privacy of
e-commerce transactions to the same extent as
traditional commerce.
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Principles to guide tax policy
2. Simplicity

Simplifying current tax systems will ease
technological solutions to collecting tax on the
net.
Jurisdictions
should harmonize the classification of
goods and services, within both retail sales and VAT
systems, and limit the number of tax rates.

The application of current law to e-commerce
should be clarified where necessary.

Tax authorities should use e-commerce
technology to reduce compliance costs.
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Principles to guide tax policy
3. Free trade



E-commerce imports should not be taxed more
heavily than similar domestic supplies.
Double taxation (by the country of export and the
country of import) should be avoided.
On-line provision of services and digitized goods
should remain duty free.
Consistent
with U.S. policy seeking to reduce tariff and
non-tariff barriers to trade.
Consistent with current tariff schedules and customs
procedures that are applicable only to commodities.
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Principles to guide tax policy
4. Technological efficiency


Taxes should not interfere with the development
of efficient, market-driven e-commerce
technologies and business models.
This tax policy strategy will minimize compliance
costs and maximize efficiency.
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Conclusion



There is no support for “Chicken Little” claims that
the tax system is hemorrhaging as a result of
e-commerce.
Nor is the healthy development of e-commerce
dependent on a perpetual tax moratorium.
Rather, the Commission should seek:



Neutral taxation of alternative methods of conducting
similar transactions.
Simplification, so taxes can be collected at reasonable
cost from both small and big businesses
Utilization of e-commerce technology by tax authorities to
lower compliance costs.