Explain why the taxation of e-commerce raises governance and jurisdiction issues.
Answer: The taxation of e-commerce illustrates the complexity of the governance and jurisdictional issues in the global economy. Most of the issues surround the sales tax imposed by various states or countries on products sold to residents of their state or country. Governments the world over rely on sales taxes to fund various types of government initiatives and programs including the building of roads, schools, and sewers or other utilities to support business development.
In the United States, between the fifty states and the multiple counties and municipalities, there are thousands of different tax rates and policies. For example, in some states food is not taxed at all and there are a myriad of different exceptions and inclusions depending on the locality. However, with the rise of e-commerce and virtual storefronts, the question is raised as to what locale a virtual storefront is considered to be located in. The development of MOTO (mail order/telephone) retail in the 1970s began the discussion on the taxing of remote sales. State and local tax authorities wanted MOTO retailers to collect taxes based upon the address of the recipients, but the Supreme Court has ruled that states cannot force MOTO retailers to collect taxes unless the business has a physical presence in the state. Legislation to the contrary has never been able to garner sufficient support in Congress due to pressure from both the catalog merchants, leaving intact an effective tax subsidy for MOTO merchants.
The merger of online e-commerce with offline commerce further complicates the taxation question. Currently, almost all of the top 100 online retailers collect taxes when orders ship to states where these firms have a physical presence. But others, like eBay, still refuse to collect and pay local taxes, arguing that the so-called tax simplification project ended up with taxes for each of 49,000 ZIP codes, hardly a simplification.
The taxation situation is also very complex in services. For instance, none of the major online travel sites collect the full amount of state and local hotel occupancy taxes, or state and local airline taxes. Instead of remitting sales tax on the full amount of the consumer's purchase, these sites instead collect taxes on the basis of the wholesale price they pay for the hotel rooms or tickets. Today there is no integrated rational approach to taxation of domestic or international e-commerce. In the United States, the national and international character of Internet sales is wreaking havoc on taxation schemes that were built in the 1930s and based on local commerce and local jurisdictions.