Term Paper on Sales Tax
E-commerce starts to gain more and more popularity around the world as the economy becomes globalized and physical borders between different states and trade zones get more transparent. Now one is able to buy absolutely anything without the need to leave the house with only a few clicks of the mouse. Americans can buy from Asia, Asians can buy from Europe or Africa, or any other part of the world which
In the following essay I will answer the normative question of economics, i.e. If goods purchased on the internet should be subjected to state sales tax and the positive question, i.e. what impact the repeal in taxed goods sold on the internet will have on a state’s government and retailers. I will use educated findings together with my personal opinion.
In order to better understand the specifics of e-commerce and its taxation one should explore how ecommerce differs from regular commerce that one understands well and taxes well. Ecommerce involves distributing, buying, selling, marketing and servicing different products and services over the internet and other computer networks that are setup around the world. The IT industry views ecommerce as a part of electronic business as long as it involves commercial transactions. Ecommerce is about electronic money transfers, e-marketing, online marketing, supply chain management, online transaction processing and electronic data interchange, as well as electronic inventory management, data-collection systems and electronic communications. The typical “tools for conducting electronic business is the WWW, internet, email, cell phones, extra and intranets and portable communication technology” (Jones 311).
In the year ended December 31st, 2004, electronic commerce generated in sales $16 billion. Such figure grown year after year and it had been made apparent to most governments and authorities that such sales need to be taped and taxed, yet up till present there “still had not been developed any meaningful way of taxation and profit assessment” (Carroll, 50).
Originally, the invoices and purchase orders were emailed and sent electronically from one organization to another as signs of doing business or business enquiry. Ultimately, it had been made possible to pay online with the help of different credit cards over the WWW through secure servers such as Https, e-shopping carts, payment processor companies and the like. In the past, during the dot-com era, money on the internet had been made exclusively via the internet, with the traditional brick-and-mortar organizations developing only rudimentary, informative websites that would show people the news of traditional organizations and featured some ads and commercials “aimed at bringing people to traditional offices and shops” (Taylor, 78). Only in 2001-2002, most traditional organizations understood the opportunity that the ecommerce presented to them and started to use websites for purposes other than just informative. For instance, Safeway and Albertsons, two large supermarket chains created websites where a person was able to order certain products online and have them delivered to the person’s house free of charge. At present e-commerce is well-developed in the first world industrialized nations and is virtually non-existent in most third world nations. One should take a note that ecommerce due to the unregulated nature of the market offers greatest opportunities for most countries, industries and companies which can capitalize on such lax environment which many well-established and conservative companies still avoid. Because the consumers are willing to buy more than producers are willing to sell online, “it creates high Demand on the WWW for products and services” (Plant, 43). I will note that since demand always creates a supply of something, more and more companies take the necessary steps to penetrate the internet and offer their products and services for sale.
Going back to the first question “If goods purchased on the internet they should be subjected to state sales tax” I would like to note that while indeed it is reasonable to tax sales in practice it would be rather hard to do so. First of all, one needs to remember that matching principle which states that goods can be taxed only when the transaction takes place within the borders of a certain state. If a US customer purchases on the eBay a laptop computer from China, the sale takes place online and apparently no tax should be applied. The things get more complicated if a customer has a bank account opened in another state and uses an anonymous proxy server which does not allow anyone to identify from where he connects to the internet. Even if it might be possible to tax durable goods by catching them at the border (if they come from abroad) or obliging all delivery companies to report all the goods they ship to the IRS (to track domestic ecommerce orders) it would make the state spend a fortune on devising an effective system of keeping track of such order. Still, to track online services it would make things even more difficult. If a US user pays a subscription fee to view some European or Asian pornography on the internet or receives custom-tailored horoscopes from India, the transaction formally takes place, yet to track it would be extremely difficult and prohibitively expensive. Thus, if one cannot tax services yet can tax durable goods sold online (even with problems) it would be rather unfair for the producers of durable goods “who have to pay taxes while the service companies never have to pay a cent in taxes” (Reynold, 198).
As one can observe from the picture prior to instituting the tax on ecommerce the supply and demand interact in point X which represents the ultimate price and quantity as determined by the supply and demand interaction. The presented tax will almost always be reflect in the price since the company will pass on that tax to the ultimate customers by increasing the price. As a result, the price will increase to E2, thus creating a disparity between the quantity supplied and quantity demanded that will be represented by A and B interaction points respectedly. Ultimately the supply demand interaction will move to Z, where the same supplied quantity will cost most to the ultimate consumers and the XZ price increase will go directly to the budget. Still, if the government does not manage to tax all companies (foreign and out of state) it will simply give away a market share equally ZB to companies which are not taxed and can provide products at cheaper prices to fill in the original demand, fallen due to tax.
From the first question, one arrives directly to the second one which asks “what impact the repeal in taxed goods sold on the internet will have on a state’s government and retailers?” As noted earlier, the repeal in taxed goods sold on the internet will bring more justice to the taxation system which will assure that if service companies do not pay taxes, the durable goods/manufacturing companies also do not pay taxes. The long-term impact of the repeal in taxed goods cannot be effectively predicted simply because the states are dynamic and usually are quick to respond to the challenges and problems. Ideally, if the states never taxed any ecommerce goods, most sales would shift online. Taking into account the growing technology and graphics it would be possible to visit different shops online upload one’s profile (photo) and try on different clothes on that profile. By the same token one would be able to buy just about anything online. One could watch movies online (visit movie theatres), “take fitness classes, order goods from abroad, etc” (May, 241). The traditional industries will be limited probably to things that require a human presence in things such as hair dressers, restaurants, or cafes.
Apparently, if one does not tax online businesses, they would have an advantage over traditional taxable companies that rely on traditional ways of doing business. As a result online businesses and ecommerce will take over traditional businesses and will contribute to the unprecedented growth on the IT, IS and EDI industries which will assure that people have decent computers with decent graphics capabilities, high internet connection speed and other attributes that would allow humans uninterruptedly shop online and make use of other online services that are out there.
In conclusion I would like to note taxing ecommerce at present with the present tools and capabilities is a rather tricky, difficult and costly thing that not many governments can afford. While it is difficult and challenging to tax ecommerce producers and sellers of goods, it is almost impossible to tax sellers of electronic services. It is even more difficult to tax the foreign sellers. Ultimately, it appears to be a matter of justice and advantage that a certain state wants to give to its businesses or take it away from them. Taking ecommerce businesses will mean that a state will depress its ecommerce creating a disadvantage not only for individual states against other e-businesses from other states but also to the whole country by placing a tax burden on US e-businesses and making them less competitive in comparison to the foreign online businesses which typically are not taxed by their governments due to lack of government resources.
Taylor, Dave, The Complete Idiot’s Guide to Growing Your Business with Google, Prentice Hall, 2004.
May, Paul, The Business of Ecommerce : From Corporate Strategy to Technology (Breakthroughs in Application Development), McGraw Hill, 2003.
Reynold, Janice, The Complete E-Commerce Book: Design, Build, and Maintain a Successful Web-Based Business, NY Random House, 2004.
Carroll, Jim, Selling Online : How to Become a Successful E-Commerce Merchant, Wiley and sons press, 2003.
Plant, Robert, eCommerce: Formulation of Strategy, Barrons books, 2004.
Jones, Nick, ecommerce: Critical Success Factors That Will Make or Break Your Online Business, Prentice Hall, 2003.
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