State and Local Taxes

1
State and Local Taxes

• Taxation of e-Commerce
• Chapter 9

2
E-Commerce

• The exchange of goods and services by electronic
  means
• Will likely top 1 trillion in economic activity
• Internet and e-commerce are becoming larger
  contributors to the economy
• Important to understand how this trend affects
  government, businesses, and society

3
E-Commerce

• Taxation of cyberspace transactions
• State and local tax issues
• May require fundamental reform to deal with new
  economy
• Similar issues exists with Federal and
  international trade
• Congress has placed a moratorium on any new state
  and local taxes over concerned that taxes could
  choke off this growth sector

4
E-Commerce

• Internet Tax Freedom act of 1998 (IFTA)
• Enjoins state and local governments from imposing
  multiple or discriminatory taxation on e-commerce
  to access to the internet

5
The Internet and Internet Commerce

• Origins traced to 1960s DOD researchers
• E-commerce existed among a small group of
  business partners
• Software was cumbersome and hardware was
  expensive
• Private operators stepped in by 1995

6
Constitutional Limitations on the States Power
to Impose Taxes

• General Principles
• The micro-multinational form of business has
  spawned
• States power to impose tax is limited by
  constitutional provisions
• A state can impose tax on interstate business if
  sufficient nexus under both Due Process and
  Commerce Clause of U.S. Constitution
• Landmark case was Quill Corporation v. North
  Dakota (1992)

7
Constitutional Limitations on the States Power
to Impose Taxes

• The Theory of Agency or Attributional Nexus
• Taxing jurisdiction may assert nexus by
  attributing to the taxpayer the presence of
  another person or entity
• Leading case was National Geographic Society v.
  California Board of Equalization (1977)
• Affiliate Nexus Theory
• The nexus of one corporation is attributed to
  another under special circumstances
• Some states try to bring consolidated groups
  under its jurisdiction

8
Constitutional Limitations on the States Power
to Impose Taxes

• Nexus through Economic Presence
• Geoffrey Inc v. South Carolina Tax Commission
  proposed that economic presence may be sufficient
  for establishing nexus
• A number of states have adopted South Carolinas
  approach and require entities with an economic
  presence within the state through intangibles to
  pay the state income tax

9
State Sales and Use Taxes

• Cornerstone of state tax revenue bases
• Viewed by local governments as a reliable source
  of revenue
• Advantages are low rate, high yields, and limited
  collection costs
• Taxpayers frequently complain that there is
  little consistency or coordination among the
  states with regards to tax administration

10
State Sales and Use Taxes

• Problems applying these type of taxes to
  e-commerce
• Heavy dependence of sales and use taxes on
  geographical and political borders
• Determining the location (situs) becomes
  difficult
• Identity of the purchaser must be known
• Destination of the receipt and use of the goods
  must be known
• Multiple jurisdictions result in compliance
  problems for the retailer

11
State Sales and Use Taxes

• Sales tax issues in Internet-delivered services
• Oklahoma Tax Commission v. Jefferson Lines
  provides insight to tax issues with
  internet-delivered services
• A sales tax should be an un-apportioned tax
• The sales can be taxed measured by the gross
  charge for the purchase without dividing the tax
  base among the different state in which the
  activities may occur
• A sales of services is a local event
• Past decisions on the taxation of gross sales
  receipts in the hands of a seller of services
  adequately support the view that the taxable
  event is local

12
State Sales and Use Taxes

• Sales tax issues in Internet-delivered services
• Applicability of Jefferson Lines to Cyberspace
• There was some local event, specifically the
  agreement, payment, and delivery of some of the
  services, in the taxing state.
• Basic premise is challenged because cyberspace is
  a world without geographical boundaries

13
State Corporate Income Taxes

• Questions raised ragarding the apportionment of
  income to the various states
• For multi-state corporations, states typically
  use an apportionment formula comprised of a
  payroll factor, property factor, and a sales
  factor to determine the portion of taxable income
• Complications arise from the sales factor related
  to e-commerce

14
State Corporate Income Taxes

• Sourcing rules for tangible personal property,
  intangible property, and services
• Income-producing-activity Rule typically
  all-or-nothing rule or pro-rata allocation rule
• Destination-based Rule based on where the
  services are consumed
• Throwback Rule where sales into states where
  sales of tangible personal property is not
  subject to tax, states are required to source the
  sale to the state from which the goods were
  shipped

15
State Corporate Income Taxes

• Sourcing rules for tangible personal property,
  intangible property, and services
• Potential for Double Taxation some states tax
  services based on where service performed and
  some states tax on where the service is received

16
The Internet Tax Freedom Act of 1998

• One of the few times U.S. Congress ahs intervened
  between private sector and state and local
  governments
• Key ingredients of act
• Placing a moratorium on certain taxes on the
  Internet
• Establishment of an Advisory Commission on
  Electronic Commerce
• Report of the Commission

17
E-commerce Taxation Much ado about nothing?

• Little empirical evidence on the likely effects
  of taxing or not taxing e-commerce
• Cline and Neubig estimate that sales tax not
  collected amounts to one-tenth of 1 of total
  state and local government sales and use tax
  collections
• Bruce and Fox estimate total revenue lost for all
  states due to e-commerce is over 10 billion