Taxation and the Future of Electronic Commerce

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In the United States, taxes on Internet transactions have become the target of state and local efforts to increase revenues. Although federal governments prefer no new taxes in electronic commerce, a powerful argument for levying state and local taxes exists because transactions that are now taxed migrate to the Internet, leaving governments with a reduced tax base. To at least maintain the current level of tax revenues, state and local governments need to figure out how to apply existing rules of taxation to electronic transactions. Although discussion in this section mostly relates to the U.S. experience, similar situations are found globally.

Various governments' initial efforts to tax Internet commercial activities have resulted in numerous instances in which even the basic definitions of sales and use tax regulations have been found inadequate. Even the distinction between sales tax and income tax becomes unclear when business is conducted on the Internet. But most of all, the fluidity of online taxable entities makes it difficult to establish at any one time what is being taxed, who should be taxed, and who can impose taxes.

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