Ask Slashdot: e-Commerce, Taxes & Private Transactions.

thal asks: "With the apparent inevitability of taxes on transactions over the web, what exactly will/should be defined as private transactions that are not to be taxed? Obviously, if you buy a gadget from gadgetseller.com with your credit card, you will be taxed. But what about baseball cards sold on Ebay? What about a garage band who asks you on their website to send in a $5 bill for a copy of their CD? These types of sales between two people have historically been, at the very least in practice, exempt from taxes, but will/should sales on the internet automatically be considered taxable?"

The edge between private & public transactions

thai wrote
With the apparent inevitability of taxes on transactions over the web, what exactly will/should be defined as private transactions that are not to be taxed

This is not an easy answer as it squarely hits the contentious questions of sovereignty, juristiction, and individual beliefs of the role of governments. Firstly, some background. As a starting point, I'd recommend people have a gawk at understanding the relationship [polyconomics.com] between taxes and economic activity. Basically as economies become more sophisticated, activities move from private endeavours (e.g. subsidence farming) to measureable activities (ie tracking the cashflow through the national accounting systems) to take advantage of the legal framework (contract law, safety standards, etc). This is one factor in a country's GNP, eliminating the inefficiencies in bartering by moving to a currency based transaction system with improved liquidity and retained value. To see the effect, just look at the economic collapse of Russia which has basically reverted to bartering goods between factories and inviduals. The original US constitution assumed an informed agreement between equal sovereign individuals (private property rights) which have been supplanted and augmented by federal commerce codes which support legal contracts for inter-state and international trade.

Now with the internet, there are already taxes on the seller (income tax, sales tax, incorporation, etc). What is worrying some groups is that the internet provides an alternative mechanism to minimise a consumer tax collected at point of physical sale. This is a particular concern with new taxes such as the forthcoming GST in Australia which wants to include the sale of secondhand goods within the tax base (previously excluded as it was too difficult to calculate an equivalent value in dollar terms). The issue is rather murky (OK downright opaque) as the internet is a half-way network caught between the concept of private intranets (original federation of AARNET servers) and a regulated public carriageway (telcos, radio, ISPs, etc). Hence there are multiple juristictions (not to mention different global standards) and inappropriate legal precedences with favor one party (usually the incumbents).

To answer your question, the Internet will be taxed when the overheads of regulation to curb the excesses (e.g. Spam, fraud, trust systems, etc) shifts the Laffer Curve such that there is a net increase in beneficial economic activity. The most appropriate mechanism is still yet to be determined, it may well be the governments insist that the credit card companies collect a compulsary levy which is refunded through a later rebate, it may be that governments insist that all transactions pass through a public key infrastructure which collects a small fee for each access, it may be that they charge the telcos a network volume fee leaving it up to companies to recover (ie pass on the costs) to the actual consumer. You actually might be surprised at how many "invisible" taxes and charges there are. I haven't seen any authoritive studies but some people speculate that 40-50% of the US GDP flows through the public sphere in some form or another (federal, state, municipal taxes/charges).

Governments naturally want to broaden their tax base to encompass as much economic activity as possible, efffectively to provide "consumer protection" in return for a slice of the action. When this becomes too onerous, you will see the rise of alternative "currencies" for local exchange, use of other intangible non-taxable entiries (frequent flyer points) and the favorite game of controlled multinational corporations for transfer pricing (ie shift high visible costs into tax heavy juristictions while assets are moved into tax havens). The internet has just opened up a huge bottle of worms as now similar practices are available to the individual with some savvy ... can we say offshore gambling joints which have a secondary role as money laundary?.

In short, you can bet your bottom dollar that international governments will move to protect their interests. Currently there is a hands-off policy as, despite the hype, the internet only accounts for a tiny portion of world economic activity. This will change when it starts being at least 10% of all purchases. The only question is in what form it will take and whether the cost is worth the benefits. It is up to all the public interests groups/institutions to carefully scrutinise any proposals to ensure fairness and that any taxes are spent to support the appropriate activity.

LL

Practical Taxation -- the complexity [long]

The reason this problem is so thorny is that it is extremely complicated. Several previous posters have done an excellent job of explaining how the current tax system (tries to) work, why, and where it doesn't work. Rather than applying more duct-tape and bailing wire to the existing system, maybe we should consider what the perfect system would be. Now, ideally in the perfect system I'd pay no taxes. But I'm enough of a realist to understand that our Local, State and Fed buddies do perform useful (though usually grossly inefficient) services for us that we'd miss if they all went broke. I don't mind the theory of paying taxes. The practise is just a little inefficient and unfair. The challenge is to use whatever means we have available (computer and old-fashioned) to rework the design of the public-service-sector-income system. Not just for the locals, state, or feds, but why not for the whole world?

Background: The problem facing internet tax collection now is one of severe complexity. The actual amount due is calculated based on a number of factors, some of which could be the location of purchaser and seller, origin of the goods (if they're even material goods), destination of the goods and a host of factors relating to the composition and tax history of the goods themselves. As an internet merchant myself, I realize that just accurately collecting tax on our shipments to the other 49 United States would greatly complicate the infrastructure of our order processing system, not to mention the unavoidable paperwork and bureaucracy involved in dealing with 49 other uniquely different state governments. It's not practical as is. Add into this the complexity of dealing with tax calculation and collection for other countries (something that is now dealt with as goods enter a foreign country, and is usually the responsibility of the recipient) and you can see that the system threatens to fall over and catch fire.

Review the different types of tax systems:
Federal Income Tax: In the US, it's very complicated, no one feels it's fair, and regulation/enforcement/evasion/fraud are a constant problem.
Non-Federal Sales Tax: Simple, and ubiquitous. Some amount of evasion/fraud goes on already, currently deemed inconsequential though a number of state/local entities are cracking down on this. Because it is administrated below the federal level, it leads to a morass of different systems, and interstate transactions can result in confusing or difficult-to-enforce situations.
Federal GST: Don't know. Never lived anywhere where it was in effect. Some people seem to like it, some don't.

I would love to see our federal income tax go away, if only because I think our GNP would skyrocket given that the entire country would have the equivalent of one extra month of productivity from the man-hours no longer spent calculating Uncle Sam's take. However, I think a federal GST or uniform sales tax would be as prone to abuse as our current income tax system. Maybe more. It's very easy to do small transactions under the table for cash. It's harder to sweep income transactions under the rug because one side of the deal is almost always a corporation with lots to lose if they get audited.

The Digital Fractional Flat Tax: Here's a really shocking idea: I think a true digital currency would HELP resolve the tax situation. As Big-Brother as it seems, it might help with our freedom. Basically, all digital bank account transactions could bleed a little bit off the top for their jurisdictions. The actual amount would be determined by the jurisdictions of the origin and destination accounts. Transactions between two of your own accounts would be exempt. Any other transaction, including to/from paper currency would incur the tax. The idea would be to make the actual tax percent quite small, but ubiqitous. Transactions into other currencies would incur the half-taxation rates of both governments. We pay fees like this all the time already to banks. If we streamlined the currency system so we needed banks less, those fees we already pay could take the place of our governmental taxes, and we would have a net win.

If I (in Colorado) buy something from someone in Texas, both states can skim their bit off the top of the transaction. Maybe the feds get a little bit too. If I live in a state with no taxes, then one less bite gets taken out. If I want to have an offshore bank that doesn't charge taxes (dunno how they'd keep the doors open and the lights on, but..) then I never pay that part of the transaction tax. But even in that situation, if I buy something at a local store, my city, state and maybe the feds, will each collect their fractional-tax. I buy an information-product from an offshore tax-free merchant and pay for it from my offshore tax-haven bank? No jurisdiction. No tax. No problem.

The advantage? You can see it all going on. It's accountable, visible, summable and provable. You know what you're paying and who's getting the money, and you can choose to do your transactions accordingly. I think it would raise awareness of how much you really pay, and where it goes, which would hopefully lead to some government spending reform. Obviously, some transactions and people/organizations will probably try to become tax-exempt. Dunno if it's really important. Digital money also offers a way to really see the movement of your money. I'd like to see at the end of the year, an accounting of how much of my tax money went where. And maybe the ability to decide how much of my money I _wanted_ to go where. But that's another story entirely.

So, tell me if you think I'm crazy. Sorry for the length, but I wanted to say it completely and correctly.

Philosophical argument

I [robertgraham.com]'m surprised that people aren't looking at this from the philosophical side. Nobody has questioned the philosophical basis behind the right of goverment to tax.

I'm not sure what other people feel is the philosophical basis for taxation. It seems to me perfect taxes are basically usage taxes: what you pay exactly matches the benefit you get. For example, rich people should probably pay for for police protection because they have more to lose in a theft. Another philosophical basis might be to "adjust" society to be more like one would we like to live in (i.e. we don't like others around us to suffer in poverty). Combining those two mean we'd prefer gasoline taxes to toll roads, for example (we don't want usage toll booths every mile, and gasoline taxes approximate the benefit AND encourage lower pollution etc.).

For example, if I go to the local store and buy something, the local government probably has the right to levy a sales tax. It maintains the roads I use, it provides police protection, etc. However, when I buy from the Internet, the local government is much less involved. Does my city or state government have the right to tax transactions at the same rate as before? (BTW, the federal government is much more involved, i.e. tracking hacking, fraud, and the lot, but they don't see the money).

Currently, taxes are pretty much a blunt instrument. In the above example, much of what I pay for in the sales tax isn't related to the transaction, but the theory is that it "correlates". Richer people benefit from government services such as fire protection on more expensive homes, and they tend to buy more. Therefore, we think it ok to charge a "fee" for the transaction even though the "benefit" as nothing to do with the transaction.

From this perspective, the government currently subsidizes Internet transactions. The FBI tracks down credit card fraud, which effectively lowers your credit card fees, but you don't pay for that protection. Likewise, shipping your books from Amazon.com creates wear-and-tear on the roads, but you don't pay for that.

Personally, I like the idea of a tax-free Internet zone precisely because taxes across International borders gets difficult. For example, the company [networkice.com] I work for sells a $39.95 product [networkice.com] that we've sold over the net to Europe, Canada, Asia, South America, etc. We simply cannot handle a country-by-country tax problem. It would cost much more than $39.95 to sell a single copy to Venezuela, for example. Direct Internet taxation will stifle lots of business activity.

As a consequence, I'd like to search for other ways to indirectly tax Internet transactions. A fuel tax springs to mind (which I like for other reasons) to tax shipments. A credit-card tax would also be a good thing (since the government is already subsidizing credit card transactions anyway). In other words, rather than stifle all the small businesses which aren't equiped to deal with the taxes, why not shift the burden onto the big companies that can?

Anyway, those are my thoughts.

What *is* a web transaction anyway??

I buy a lot of stuff over the web, but I've never made a "web transaction". I pay by credit card or money order.

People are mixing up how buyer and seller contact, and the transaction itself. Two very different things. Taxing the transaction makes sense. Taxing differently depending on the medium of contact does not.

The absence of a "phone transaction tax" or "fax transaction tax" speaks volumes. *Could* it be that people pushing for this do not have a full grasp of what the internet is??

I think the real issue here is the somewhat odd US law/custom that transactions where buyer and seller are in different states, are not subject to sales tax. With improving communications, that is bound to give the taxman a bigger headache each year.

International trade

This is an attempt to answer those of you with comments about international trade. The internet is international with info transmitted thru a dynamic global communication network. Equipment and products cannot fit into a fiber optic cable. If history is any indication of the future, then it will be relatively "simple" to monitor international sales for some things. I'm not saying that is right or wrong, this is just a potential scenario. Impose a tariff that the federal governmnet collects. And if the tariffs maintains job in your congressional district then the pols would say great.

The in and out of big items into the US is controlled by US Customs. Tariffs restrictions could be imposed. This agency does conduct periodic inspections; this will probably increase in the future. If you screw up then pray that the feds are on their coffee breaks. Screw up then your return address will be toast. If your return address is not in the data base, then you are toast.

Small items will (may) still get thru. For instance, by regular mail.

The key is import restrictions, not exports if you operate in the US. Of course if you find a country with no import restrictions, then you flood them with cheap stuff.

Remember, digital information is information that can be stored and efficiently analyzed. It would be relatively simple to stomp on those ppl that don't abide by the digital rules imposed by the governments around he world.

No score all the way!

How sales taxes work

I had to implement a system to handle sales tax on network transactions as part of the late, lamented American Information Exchange system years ago (pre-web, a long story, not relevent here, ask me about it in some other context). As a result I learned more about this subject than anyone should ever care to.

Basically, how it works in the US is this: sales taxes are charged to the buyer in the state where the buyer is located at the time of the transaction. The seller is expected to act as an agent for the state to collect the tax from the buyer in those cases where the seller has a "business nexus" (I'll get to that shortly) in the buyer's state. In cases where the seller does not have a business nexus in the buyer's state, the buyer is expected to submit the tax to the state directly, though, as a practical matter, this almost never happens.

The key factor in determining if the seller is expected to collect the tax is, as I said, is this idea of "business nexus". What this means is that the seller has some presence in the state which makes it subject to that state's jurisdiction. Obviously, if you are physically doing business in a state, you have nexus there, but other things can suck you in as well. For example, if I run a mail order business from New York that rents office space in California (say my catalog designer works from there), the State of California can claim I have nexus in California. Similarly with having warehouse facilities in a state, or employees who reside there, or any number of vastly more subtle things. Other than the most straightforward cases (e.g., you live there), the determination of business nexus is litigated on a case by case basis. Some states are more aggressive than others in pursuing this, and some are more creative. Some of them are extremely creative and are constantly trying to push the outside of the envelope. There was a case where a state (I believe it was Wisconsin, but don't quote me on that) attempted to claim that they were owed sales tax on sales of in-flight liquor sold by out-of-state airlines on the basis that the airplanes were overflying their state and thus the airlines had nexus there (they lost, but it illustrates the lengths some states will go to). Some states have tried to claim that use of the mails or the telephone system caused nexus (i.e., "you used phone lines that physically run through our state to communicate with the buyer, thus you were doing business here"), but this has been dispensed with too, though I believe by an act of Congress rather than by litigation. The hit-or-miss nature of this process is the reason why mail-order businesses (and web retailers) will typically have a list of sales tax states that seems entirely random. Basically, those are the states that came after those particular businesses and won.

The web does not introduce any substantive new principles in all this, but it does create a situation in which large numbers of individuals and very small businesses are now potentially doing business in a zillion different tax jurisdictions, and this is bound to get messy as the tax authorities' greed asserts itself, as it inevitably will.

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Precedent

A number of basic precedents will guide the hand of the government in taxing internet sales...

1. A number of historic decisions exist that state that the Federal government cannot restrict or otherwise regulate interstate commerce. These decisions actually hampered the passage of antitrust acts around the turn of the century... the origins of this lie in early American history, when state-to-state trade was taxed-- the Antifederalists resisted any movement to give the Feds power to regulate in this manner.

Because of this, only States have been able to tax sales, and only those within their own state. Thus, it can be expected that internet sales will follow the course of mail-order. You'll only be taxed if you are in the same State as the provider of the goods.

2. As far as internet auctions, I have no idea. I don't _believe_ (not exactly sure here) that auction items are taxed at physical auctions, so it can be expected that the same laws will apply.

The easiest way to predict in what way things will be regulated in the future is to look at the past. It is rare for judges to create new precedent, even when dealing with new situations, because they are expected to administer justice on a solid basis. It can be expected that rather than attempt to create a new system, the legislative and judicial bodies of this land will merely apply old law.

Also, why is everyone under the impression that internet sales are so revolutionary? They are, in effect, only an extremely fancy version of mail (or phone) order, and will likely be treated as such. Granted, the internet and its ramifications are astounding, but in this case, not much has really changed...

The wonders of wireless, GPS and little brother

Money__ [slashdot.org] wrote
Sheeeees LL thanks! . . . da hell is that . . yer thesis?!

No, just a curious wanderer on the information backlanes (it's rather interesting what you can pick up just rummaging around academic research papers).

One intriguing point that nobody has picked up is the rather interesting convergence between the Internet, wireless and global positioning system. If you think you can avoid sales tax by accessing an out-of-country server, you can forget about it. The companies are already three steps ahead of any scam any individual can dream up.

My speculation is that since governments will make GPS compulsary for mobile phones (and thus PDAs) on the pretext of ensuring emergency rescue, they can tax the physical point of purchase (all mobile phone tracking stations can identify the cell of origin) and since all IP addresses can be matched to physical devices, they can thus ultimately match to an identity whether individual or business tax number. It is also not well known but a certain Redmond company has invested heavily in an electronic financial clearing house. Taxes may be onerous but at least they are open to public scrutiny (e.g. the Gore FCC telecom charge to fund internet access for disadvantaged schools). On the other hand, who notices the nickle and dime software "tax" paid on every single transaction? Witness Adobe's bright idea of charging a fee [adobe.com] for every secure PDF file that is copied. Not to mention that your purchasing patterns will be recorded by some computer somewhere for later ... ummm .... analysis :-). As Sun's CEO noted, you can forget about any idea of privacy ... you can't escape little brother unless you shift to a place like Serbia which has been bombed back into the Stone Age.

The price of a free society may be eternal vigilance but at least the consumers should be informed about any "hidden" costs.

LL

National sales tax

I recently discovered a new proposal to rid income tax altogether, placing a national sales tax [fairtax.org] in its place. Initially I thought the idea seemed a little far fetched, but the more I read the more compelling the case is. It would solve the problem of lost revenue due to internet sales, make it possible to save and make money off your savings without tax, transform the taxing system to a no-loop-holes (fairer) policy that would catch money from the underground market (the bad guys don't report their income, but have to buy goods and services just like the rest of us), and make is obvious just how much we are taxed (ie, you look down at your receipt and see a 23% tax for the fed and think to yourself "Man, This is too much!"). Goods would only be taxed once, meaning used cars, used baseball cards, used houses would not be taxed. Businesses that sell to other businesses would not be taxed. Foreigners would pay right alongside the rest of us when visiting the US. Oh, did I mention it would solve the e-commerce question? ;)

Any thoughts?