e Commerce Definitions

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E COMMERCEE COMMERCE


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ContentsContents

What is e-commerce?What is e-commerce?

A brief history of e-commerce A brief history of e-commerce

Some facts and figuresSome facts and figuresTax policy implicationsTax policy implications

Suggested principles to guide tax policySuggested principles to guide tax policy


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A broad definition A broad definitionInteractions possessing three attributes:Interactions possessing three attributes:

(1 bet!een t!o computer applications"(1 bet!een t!o computer applications"(# completes all or part of business transaction" and(# completes all or part of business transaction" and

($ crosses enterprise boundaries%($ crosses enterprise boundaries%Includes business applications o&er 'A s that ha&eIncludes business applications o&er 'A s that ha&ebeen used for decadesbeen used for decades

)lectronic data interchange ()*I)lectronic data interchange ()*I

+redit card and debit card transactions+redit card and debit card transactions)lectronic fund transfers (),T)lectronic fund transfers (),T


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A narro!er definition (i-commerce A narro!er definition (i-commerceimited to business applications o&er openimited to business applications o&er open

net!or.s using non-proprietary protocolsnet!or.s using non-proprietary protocols

such as the Internetsuch as the Internet*efined narro!ly" e-commerce is barely four*efined narro!ly" e-commerce is barely fouryears old/years old/

Includes b#b applications o&er openIncludes b#b applications o&er opennet!or.s as !ell as b#c applicationsnet!or.s as !ell as b#c applications


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0usiness-to-consumer (b#c examples0usiness-to-consumer (b#c examplesetailetail -- catalogue" configuration" sale" payment-- catalogue" configuration" sale" payment

0ro.er" agent0ro.er" agent -- auction" tra&el" auto" real estate-- auction" tra&el" auto" real estate)ntertainment)ntertainment -- gaming" gambling" music-- gaming" gambling" music+ommunications+ommunications -- e-mail" e-cards" net radio-- e-mail" e-cards" net radio,inancial ser&ices,inancial ser&ices -- securities" insur%" ban.ing-- securities" insur%" ban.ing2ublication2ublication -- ne!spapers" maga3ines-- ne!spapers" maga3ines*atabase*atabase -- directories" maps-- directories" maps2rofessional ser&ices2rofessional ser&ices -- 4tele-medicine5-- 4tele-medicine5)ducation)ducation -- 4distance learning5-- 4distance learning5


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History of e-commerceHistory of e-commerce

Source: OECD, The Economic and Social Impact of Electronic Commerce, 1999.Source: OECD, The Economic and Social Impact of Electronic Commerce, 1999.


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History of e-commerceHistory of e-commerce

)-commerce is more a !ay of doing)-commerce is more a !ay of doingbusiness than a sector business than a sector 44In fi&e years" there !on6t be any InternetIn fi&e years" there !on6t be any Internet

companies because they !ill all be Internetcompanies because they !ill all be Internetcompanies% 7ther!ise" they !ill die%5companies% 7ther!ise" they !ill die%5-- Andy 8ro&e" Intel-- Andy 8ro&e" Intel2rior changes in communications2rior changes in communications

technologies also ha&e led to e&olution oftechnologies also ha&e led to e&olution ofbusiness modelsbusiness models

telegraph" telephone" radio" T'" facsimile" etc%telegraph" telephone" radio" T'" facsimile" etc%


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Facts and figuresFacts and figuresU.S. i-commerce salesU.S. i-commerce sales

0#c gets the headlines" b#b gets the dollars0#c gets the headlines" b#b gets the dollarsb#b accounts for 9 ;< of sales in 1===b#b accounts for 9 ;< of sales in 1===

>uch higher if !e count )*I" ),T" etc%>uch higher if !e count )*I" ),T" etc%

b#b is pro ected to gro! much faster" reachingb#b is pro ected to gro! much faster" reachingo&er =@; of i-commerce by #@@1o&er =@; of i-commerce by #@@1

b#b migration from 'A s to the Internet permitsb#b migration from 'A s to the Internet permitscost effecti&e use by smaller enterprisescost effecti&e use by smaller enterprises(4)*I lite5(4)*I lite5

Source: ,orrester esearch Inc%" o&% 1==9Source: ,orrester esearch Inc%" o&% 1==9


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Facts and figuresFacts and figures!c is a small share of "nternet commerce!c is a small share of "nternet commerce

US Internet Commerce, 1998-2003

1 ; 1B; 1#; =; 9; 9;

9B; 9 ;99; =1;

=#; =#;

@;

1@;

#@;

$@;

B@;

@;

@;

C@;

9@;

=@;

1@@;

1==9 1=== #@@@ #@@1 #@@# #@@$

Source: Forrester Research, Inc !"o# 1998$

DS b#c DS b#b


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Facts and figuresFacts and figuresUS direct mar#et sales to consumersUS direct mar#et sales to consumers

)-commerce is a tiny share of direct mar.et)-commerce is a tiny share of direct mar.etsalessales

Internet sales to consumers are less than $;Internet sales to consumers are less than $;

of all direct mar.et sales to consumers (est%of all direct mar.et sales to consumers (est%1===1===Internet sales to consumers amount to lessInternet sales to consumers amount to lessthan BE1@ of one percent of D%S% personalthan BE1@ of one percent of D%S% personalconsumer expenditures (est% 1===consumer expenditures (est% 1===


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Facts and figuresFacts and figures"nternet is a tiny $ of direct mar#et consumer sales"nternet is a tiny $ of direct mar#et consumer sales

%a&ue o' U S ()rect *ar+et (r)#en Consumer Sa&es, 1998-99

9 19

1#%#

CB%@

@

1@@

#@@

$@@

B@@

@@

@@

C@@

9@@

1==9 1===Sources: ()rect *ar+et)n ssoc an. Forrester Research, Inc

/ ) & & ) o n s o

' . o

& & a r s

InternetTotal


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Facts and figuresFacts and figures

International re&enues are significant for someInternational re&enues are significant for someD%S% firmsD%S% firms

Company Segment Int’l revenue (%)CDnow Music 35%Music Boulevard Music 33%Amazon Books 26%FirstParts Components 3 %!irtual Dreams Adult entertain" 25%#ource$ %&CD' The Economic and Social Impact of Electronic Commerce ' ()))' p" ( "


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D%S% dominance of global e-commerceD%S% dominance of global e-commercemar.et is pro ected to declinemar.et is pro ected to decline

>id-range estimates put D%S% share of global>id-range estimates put D%S% share of global

i-commerce sales ati-commerce sales at

about 9@; in 1===about 9@; in 1===declining to less than @; in #@@$%declining to less than @; in #@@$%

Source ,orrester esearch Inc%" 1==9Source ,orrester esearch Inc%" 1==9


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I-commerce Sa&es: U S as a ercent o' &o a&, 1998-2003

@;

1@;

#@;

$@;

B@;

@;

@;

C@;

9@;

=@;

1@@;

1==9 1=== #@@@ #@@1 #@@# #@@$Source: Forrester Research, Inc , "o# 1998

Jigh o! >iddle


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)-commerce is contributing to D%S%)-commerce is contributing to D%S%economic gro!th by raising producti&ityeconomic gro!th by raising producti&ity

Impro&ed supply chain management andImpro&ed supply chain management and

reduced in&entory costsreduced in&entory costs

educed distribution" mar.eting" and customereduced distribution" mar.eting" and customerser&ice costsser&ice costs

The 7)+* estimates b#c commerceThe 7)+* estimates b#c commerce

potentially !ill increase total D%S% factorpotentially !ill increase total D%S% factorproducti&ity by @% @;-@% C;producti&ity by @% @;-@% C;


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%a& 'olicy im'lications%a& 'olicy im'lications

*on6t let ad&ocates of radical tax change*on6t let ad&ocates of radical tax changeuse e-commerce as a pretext%use e-commerce as a pretext%

emote sales ha&e been !ith us since at leastemote sales ha&e been !ith us since at least

the Sears K oebuc. catalogthe Sears K oebuc. catalogThe Internet is a tiny share of remote sales" andThe Internet is a tiny share of remote sales" anda negligible percentage of all consumer salesa negligible percentage of all consumer sales)xcluding ser&ices (!hich generally are not)xcluding ser&ices (!hich generally are not

sub ect to retail sales tax " most b#c Internetsub ect to retail sales tax " most b#c Internetsales are deli&ered exactly li.e mail order sales are deli&ered exactly li.e mail order


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The tax system can cope !ith e-commerce%The tax system can cope !ith e-commerce%Though the medium is ne!" the issues are old%Though the medium is ne!" the issues are old%

See Jo!ley &% Whipple" B9 %J% B9C (19 = in !hichSee Jo!ley &% Whipple" B9 %J% B9C (19 = in !hichthe court opined that !riting and signaturesthe court opined that !riting and signaturescommunicated electronically through the telegraphcommunicated electronically through the telegraph!ere eLui&alent to pen and in.%!ere eLui&alent to pen and in.% 11

11 See: 0oyle" 2eterson" Sample" Schottenstein" and Sprague" 4The )merging International TaxSee: 0oyle" 2eterson" Sample" Schottenstein" and Sprague" 4The )merging International Tax)n&ironment for )lectronic +ommerce"5 Tax >anagement >emorandum" ,ebruary 19" 1===%)n&ironment for )lectronic +ommerce"5 Tax >anagement >emorandum" ,ebruary 19" 1===%


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+urrently" tax re&enue losses due to e-+urrently" tax re&enue losses due to e-commerce (if any are &ery smallcommerce (if any are &ery small

8oolsbee and Mittrain (1=== estimate that sales tax8oolsbee and Mittrain (1=== estimate that sales taxre&enues are reduced by less than 1EB of 1 percent in 1==9re&enues are reduced by less than 1EB of 1 percent in 1==9

ess if Internet substitutes for mail order ess if Internet substitutes for mail order

This does does not ta.e into account offsetting re&enueThis does does not ta.e into account offsetting re&enuegains due togains due to

2roducti&ity gro!th from business efficiency gains2roducti&ity gro!th from business efficiency gainsStoc. mar.et gains spurred by e-commerceStoc. mar.et gains spurred by e-commerce

2otential re&enue loss from direct taxes also is minimal2otential re&enue loss from direct taxes also is minimaldue to current absence of profits%due to current absence of profits%


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)-commerce highlights a number of)-commerce highlights a number ofanomalies and !ea.nesses in tax systemsanomalies and !ea.nesses in tax systems

,ederal and state telecommunications taxes,ederal and state telecommunications taxesha&e become outdated due to deregulation andha&e become outdated due to deregulation andcon&ergence of technologiescon&ergence of technologiesThe current system is too complexThe current system is too complex

$@"@@@ potential sales tax urisdictions in DS/$@"@@@ potential sales tax urisdictions in DS/

,orexia case (DH 'AT % *eli&ery of a ne!sletter,orexia case (DH 'AT % *eli&ery of a ne!sletteras a hard copy &s% e-mail or fax%as a hard copy &s% e-mail or fax%Nurisdictions must coordinate to a&oid double-Nurisdictions must coordinate to a&oid double-taxation of border-crossing transactionstaxation of border-crossing transactions

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>ar.et-dri&en technological de&elopments !ill>ar.et-dri&en technological de&elopments !illpro&ide tools for assuring tax compliancepro&ide tools for assuring tax compliance

44>any soft!are manufacturers and e-business>any soft!are manufacturers and e-businessmerchants !ould li.e to be able to identify clientsmerchants !ould li.e to be able to identify clients

uniLuely%5uniLuely%511

Tax administration should follo!" not lead" technologicalTax administration should follo!" not lead" technologicalde&elopment of e-commerce%de&elopment of e-commerce%0usiness participation in de&elopment of tax standards is0usiness participation in de&elopment of tax standards is

essential%essential%112rice!aterhouse+oopers" )-business Technology ,orecast" 1===" p% 1=#%2rice!aterhouse+oopers" )-business Technology ,orecast" 1===" p% 1=#%

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)-commerce technology has the potential to)-commerce technology has the potential todramatically lo!er costs of business to taxdramatically lo!er costs of business to taxadministrator (b#a transactionsadministrator (b#a transactions

)lectronic tax registration)lectronic tax registration)lectronic tax filing and payment)lectronic tax filing and payment*issemination of tax information on go&ernment*issemination of tax information on go&ernment!eb sites!eb sites

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Tax administrators6 fears that electronicTax administrators6 fears that electronicrecords are more easily altered are !ithoutrecords are more easily altered are !ithoutfoundation%foundation%

,or commercial reasons" firms must ensure the,or commercial reasons" firms must ensure thesecurity and integrity of their electronicsecurity and integrity of their electronictransactions and recordstransactions and recordsSophisticated auditing procedures are beingSophisticated auditing procedures are beingde&eloped for use by internal and externalde&eloped for use by internal and externalauditors" !ho must satisfy themsel&es of theauditors" !ho must satisfy themsel&es of theintegrity of electronic systems and records%integrity of electronic systems and records% 11

1 2rice!aterhouse+oopers" 4The Technologies of )lectronic +ommerce: The Integrity of )lectronicTransactions and *igital ecords for Tax Administration and +ompliance"5 prepared for the )lectronic+ommerce Tax Study 8roup (August 1==9 %

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Tax authorities should not discourage ne!Tax authorities should not discourage ne!technology to protect familiar !ays of doingtechnology to protect familiar !ays of doingbusiness%business%

Such measures !ill reduce potential producti&itySuch measures !ill reduce potential producti&ity

and national income gains%and national income gains%D%S% and foreign tax authorities shouldD%S% and foreign tax authorities shouldrecogni3e that D%S% dominance ofrecogni3e that D%S% dominance ofe-commerce is transient%e-commerce is transient%

*iscriminatory application of 'AT and other taxes*iscriminatory application of 'AT and other taxes!ill slo! efficiency gains%!ill slo! efficiency gains%7)+* is see.ing to build consensus among7)+* is see.ing to build consensus amongmember states and de&eloping countries%member states and de&eloping countries%

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eutral application of tax rules andeutral application of tax rules andgo&ernment regulation is criticalgo&ernment regulation is critical

+on&ergence of technologies is causing+on&ergence of technologies is causingcompanies to cross industry boundaries (e%g%"companies to cross industry boundaries (e%g%"broadcasting o&er the !ebbroadcasting o&er the !ebSome products can be supplied in tangible orSome products can be supplied in tangible orintangible form (4digital goods5 " but go&ernmentintangible form (4digital goods5 " but go&ernmentregulations may treat these differentlyregulations may treat these differently

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(rinci'les to guide ta& 'olicy(rinci'les to guide ta& 'olicy

+ommission6s deliberations should be+ommission6s deliberations should beguided by four basic tax policy principles:guided by four basic tax policy principles:

1%1% eutralityeutrality

#%#%SimplicitySimplicity$%$%,ree trade,ree tradeB%B%Technological efficiencyTechnological efficiency

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1 "eutra&)t1 "eutra&)t)-commerce should not be taxed at a higher rate)-commerce should not be taxed at a higher ratethan economically similar transactions conductedthan economically similar transactions conductedthrough traditional methods%through traditional methods%

As a corollary" )-commerce transactions should not be As a corollary" )-commerce transactions should not besub ect to special taxes that don6t apply generally%sub ect to special taxes that don6t apply generally%

)-commerce should not be held to a higher (and)-commerce should not be held to a higher (andmore expensi&e standard of compliance thanmore expensi&e standard of compliance thantraditional forms of commerce%traditional forms of commerce%Tax administrators should respect the pri&acy ofTax administrators should respect the pri&acy ofe-commerce transactions to the same extent ase-commerce transactions to the same extent astraditional commerce%traditional commerce%

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2 S)m &)c)t2 S)m &)c)tSimplifying current tax systems !ill easeSimplifying current tax systems !ill easetechnological solutions to collecting tax on thetechnological solutions to collecting tax on thenet%net%

Nurisdictions should harmoni3e the classification ofNurisdictions should harmoni3e the classification ofgoods and ser&ices" !ithin both retail sales and 'ATgoods and ser&ices" !ithin both retail sales and 'ATsystems" and limit the number of tax rates%systems" and limit the number of tax rates%

The application of current la! to e-commerceThe application of current la! to e-commerceshould be clarified !here necessary%should be clarified !here necessary%Tax authorities should use e-commerceTax authorities should use e-commercetechnology to reduce compliance costs%technology to reduce compliance costs%

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3 Free tra.e3 Free tra.e)-commerce imports should not be taxed more)-commerce imports should not be taxed morehea&ily than similar domestic supplies%hea&ily than similar domestic supplies%*ouble taxation (by the country of export and the*ouble taxation (by the country of export and thecountry of import should be a&oided%country of import should be a&oided%7n-line pro&ision of ser&ices and digiti3ed goods7n-line pro&ision of ser&ices and digiti3ed goodsshould remain duty free%should remain duty free%

+onsistent !ith D%S% policy see.ing to reduce tariff and+onsistent !ith D%S% policy see.ing to reduce tariff and

non-tariff barriers to trade%non-tariff barriers to trade%+onsistent !ith current tariff schedules and customs+onsistent !ith current tariff schedules and customsprocedures that are applicable only to commodities%procedures that are applicable only to commodities%

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4 echno&o )ca& e'')c)enc4 echno&o )ca& e'')c)encTaxes should not interfere !ith the de&elopmentTaxes should not interfere !ith the de&elopmentof efficient" mar.et-dri&en e-commerceof efficient" mar.et-dri&en e-commercetechnologies and business models%technologies and business models%This tax policy strategy !ill minimi3e complianceThis tax policy strategy !ill minimi3e compliancecosts and maximi3e efficiency%costs and maximi3e efficiency%

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ConclusionConclusion

There is no support for 4+hic.en ittle5 claims that the taxThere is no support for 4+hic.en ittle5 claims that the taxsystem is hemorrhaging as a result of e-commerce%system is hemorrhaging as a result of e-commerce%

or is the healthy de&elopment of e-commerceor is the healthy de&elopment of e-commercedependent on a perpetual tax moratorium%dependent on a perpetual tax moratorium%

ather" the +ommission should see.:ather" the +ommission should see.:eutral taxation of alternati&e methods of conducting similareutral taxation of alternati&e methods of conducting similar

transactions%transactions%Simplification" so taxes can be collected at reasonable cost fromSimplification" so taxes can be collected at reasonable cost fromboth small and big businessesboth small and big businesses

Dtili3ation of e-commerce technology by tax authorities to lo!erDtili3ation of e-commerce technology by tax authorities to lo!ercompliance costs%compliance costs%

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e Commerce Definitions