Online Shopping: Legal Challenges for Taxing Authorities

E-commerce offers customers the chance toa Paper TrailUnless a tangible product is delivered by
eliminate many stages in the sales/distribution chain.common carrier, it is impossible for a taxing jurisdiction
The mark-ups that occur between manufacturers,to determine that an e-commerce transaction
wholesalers, distributors, retailers and consumers canoccurred. For instance, if a consumer downloaded a
add the cost of goods purchased by consumers. Incomputer game from a computer located in a foreign
contrast, when consumers deal directly withcountry for $19.95, paying by credit card, how would a
manufacturers on the internet, the process wherebytaxing jurisdiction discover that such a transaction
intermediaries between the manufacturer and the finaloccurred?
consumer are eliminated from the supply chain isHow would it determine the physical location of the
known as "disintermediation".E-commerce differs fromseller? What if the purchaser had an internet service
mail order and telephone solicitation, the two mostprovider (ISP) in a foreign country as well?Transmitting
traditional forms of business using remote sellers,Property from Tangible to IntangibleConsider the
because these involve the delivery of goods byfollowing issues: Would the receipt of a computer
common carrier to and from a specific physicalgame in electronic form convert the game into a
location. In short, there is still a physical delivery ofnon-taxable intangible item, whereas the purchase of
property from an identifiable seller to an identifiablethe same game at a local computer store would be
buyer. States jurisdictions have wrestled with the issuetaxable because it is a tangible product?Also, if a
of collecting taxes from out-of-state mail order sellersnewspaper has an exemption from sales tax will a
and telephone solicitors for decades; e-commercenewspaper that is downloaded in electronic form
enables almost any business large or small to sell toreceives the same exemption? If not, would the tax
customers in different states andlevied on the electronic version of the newspaper be a
countries.Out-of-state vendors engaged indiscriminatory tax in violation of the commerce
e-commerce do not have an obligation to collect salesclause?E-cash IssuesElectronic money is a type of
taxes if traditional remote sellers, such as mail-orderdebit card similar to a telephone calling card where the
and telephone solicitation vendors, do not collect salescard itself keeps track of the remaining balance, rather
taxes. Sales tax cannot be levied on a transaction justthan a third party bank. This could emerge as the
because the purchaser uses e-commerce to accesspreferred medium of exchange for e-commerce.
the seller's computer to acquire property, goods orE-cash will have the same anonymity as cash does in
service. Also, states cannot use an "agency nexus"the current "underground" economy. Use of e-cash will
theory to claim that a purchaser's ISP is an in-statefurther frustrate states and local jurisdictions on taxing
agent for the seller.Commerce Defies Traditional Taxe-commerce.Multiple TaxesMultiple taxes on the same
JurisdictionsUsing the internet, a company can, intransaction or service, either in the same taxing
theory, move its e-commerce business to a tax-havenjurisdiction or two or more taxing jurisdictions, are
country and conduct e-commerce outside theprohibited. This could occur if a state-taxed internet
jurisdiction of any country that would otherwise tax theaccess services as telecommunications and then
transaction.Also, because of the speed in whichtaxed located telephone services as well. Unless a
transactions occur and the frequent absence of acredit is given to eliminate any double-taxation, such a
traditional paper trail, it will be very difficult, if nottax would violate the prohibition against multiple
impossible, to apply traditional notions of tax jurisdiction.taxes.The writer is an advocate of High Court and
This is especially true with intangible propertypracticing immigration and corporate laws in Pakistan
transmitted by computer such as software, digitalsince September 2001. Author can be contacted by
music or electronic books and services.WhileAdil Law Company (Advocates and Immigration
governments which depend on an income tax mightlawyers) Office No.3 2nd Flr Hafeez Chambers 85
have difficulty taxing e-commerce, states and localThe Mall Rd Lahore Pakistan Telephone:
jurisdictions that rely on sales and property taxes to+9242-6306195 +9242- 6360108 Fax: + 9242 6360108
fund their operations could be in deeper trouble.Lack ofCell: +92300 4254910 E-mail: adil.