Taxation of E-Commerce

The question of taxing e-commerce has been addressed in a number of forums. The main issue concerns jurisdiction: which governmental entity shall have the authority to tax a transaction that spans several jurisdictions? The goal of a comprehensive e-commerce taxation policy framework is two-fold: to avoid either double-taxation or non-taxation; and to avoid disparate treatment of off-line versus on-line transactions.

Organization for Economic Cooperation and Development

Perhaps the most important work on taxation of e-commerce has been done by the OECD. See,3380,EN-document-101-nodirectorate-no-21-1564-22,FF.html for detailed information.

Key principles for the taxation of electronic commerce were agreed to at the OECD Ministerial Conference in Ottawa in 1998. The OECD concluded that the taxation principles that guide governments in relation to conventional commerce should also guide them in relation to electronic commerce.

  • In the tax treaty area, the OECD framework provides that the present international norms are capable of being applied to electronic commerce, but that some clarifications should be given as to how these norms, and in particular the Model Tax Convention, applies.
  • In the consumption tax area, the framework provides that taxation should occur in the jurisdiction where consumption taxes place, and that the supply of digitised products should not be treated as a supply of goods.
  • In the tax administration area, information reporting requirements and tax collection procedures should be neutral and fair, so that the level and standard is comparable to what is required for traditional commerce (although different means may be necessary to achieve those requirements).

European Union

Based on these principles, European Commissioner Frits Bolkstein claimed in a speech in Sept 2000, “We have international agreement on the principle that for consumption taxes the rules should result in taxation in the jurisdiction where consumption takes place.”

In a 1998 Commission communication (COM(1998)374), the EU endorsed three main principles drawn from the OECD framework.

  • The first is that no new or additional taxes need be considered for e-commerce but that existing taxes – and specifically VAT – should be adapted so that they can be applied to e-commerce.
  • The second principle is that, for consumption taxes, electronic deliveries should not be considered as goods. In the case of the EU VAT system, they should be treated as supplies of services.
  • The third principle is that only supplies of such services consumed in Europe should be taxed in Europe (i.e., that taxation should take place in the jurisdiction where consumption takes place).

Thus, within the EU, e-commerce is to be taxed neutrally in relation to conventional trade. For VAT purposes, sales of good online are treated in the same way as any other form of distance sales (e.g., from catalogues, by phone, post, etc.). VAT will be applied at the place of consumption,subject to a number of adjustments. There are well established channels for taxing these transactions – goods purchased from third countries are taxed at import, exported goods are zero-rated and intra-Community sales of goods are taxed, under a special regime for distance sales, either in the Member State of the seller or the buyer (dependent largely on the volume of such trade carried out by the seller).

Electronic transmissions, on the other hand, are taxed as services. Specific VAT rules for certain services supplied by electronic means took effect on July 1, 2003. The rules are similar to those for goods, so that electronic services entering or leaving the EU are taxed under the law of the country of their destination. Materials on EU tax policy for e-commerce are available at

United States

The US does not have a VAT, but rather has sales taxes imposed by most but not all states and by many local governments. Sales taxes are “paid” by the consumer, but they are collected by the merchant. However, in 1992, the US Supreme Court held that a state cannot require a business with no physical presence inside its borders to collect taxes on sales to residents within its borders. Thus, in effect, a state cannot tax sales to its residents by companies whose physical presence is outside its borders, whether those sales are accomplished by telephone, ordinary mail, or Internet.

In 1998, without changing this rule, the US Congress imposed a three year “moratorium” on “discriminatory” or “multiple” taxes on Internet commerce, using its power to preempt state laws on matters affecting interstate commerce. The moratorium was extended in 2001 for a two year period, and became known as the Internet Tax Freedom Act (ITFA) (a misleading name, as explained below). As of August 2003, the US Congress was considering making the moratorium a permanent ban. The law under consideration would also make permanent a provision of IFTA prohibiting states from taxing Internet access. (Telecom services are subject to a tax paid by the subscriber, but Congress has temporarily prohibited taxing the Internet service fees paid to ISPs or other Internet access providers.)

The ITFA, however, does not prohibit states from imposing a sales tax on sales accomplished via the Internet. It only says that (1) a state cannot tax Internet transactions at a rate different from that applicable to offline sales, and (2) two or more states cannot tax the same Internet sales transaction (leaving unanswered which state is entitled to collect a tax if the corporate offices are in one state, the warehouse and shipping facility in a second, and the computer server in a third). A state still has the authority to tax Internet sales (to its own residents or to residents of other states) by companies physically present within its borders. And e-commerce companies pay whatever income or property taxes are paid by traditional companies.

Congress has the power to — and may still some time in the future — allow states to collect taxes from companies outside their borders. Some state officials have developed a proposal for such cross-border tax collection. Whatever system is developed would apply equally to mail order and Internet transactions.

For a collection of materials on the issue, see

In 1998, Congress created an Advisory Commission on Electronic Commerce to develop recommendations on electronic commerce and tax policy. The Commission concluded its study in 2000 without reaching consensus on the central issues, but its report did include a series of findings and recommendations.