E COMMERCE

Contents
What

is e-commerce?

A brief

history of e-commerce

Some

facts and figures

Tax policy

implications

Suggested

principles to guide tax policy

What is e-commerce?
A broad definition
Interactions possessing three attributes:
(1) between two computer applications,
(2) completes all or part of business transaction, and
(3) crosses enterprise boundaries.
Includes

business applications over VANs that have

been used for decades

Electronic data interchange (EDI)

Credit card and debit card transactions

Electronic fund transfers (EFT)

What is e-commerce?
A narrower definition (i-commerce)
Limited to business applications over open
networks using non-proprietary protocols
such as the Internet
Defined narrowly, e-commerce is barely four
years old!
Includes b2b applications over open
networks as well as b2c applications

What is e-commerce?
Business-to-consumer

(b2c) examples

Retail -- catalogue, configuration, sale, payment

Broker, agent -- auction, travel, auto, real estate
Entertainment -- gaming, gambling, music
Communications -- e-mail, e-cards, net radio
Financial services -- securities, insur., banking
Publication -- newspapers, magazines

Database -- directories, maps

Professional services -- tele-medicine

Education -- distance learning

History of e-commerce

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

History of e-commerce
E-commerce

is more a way of doing

business than a sector
In five years, there wont be any Internet
companies because they will all be Internet
companies. Otherwise, they will die.
-- Andy Grove, Intel
Prior changes in communications
technologies also have led to evolution of
business models

telegraph, telephone, radio, TV, facsimile, etc.

Facts and figures

U.S. i-commerce sales
B2c gets the headlines, b2b gets the dollars
b2b accounts for 85%+ of sales in 1999

Much higher if we count EDI, EFT, etc.

b2b

is projected to grow much faster, reaching

over 90% of i-commerce by 2001

b2b migration from VANs to the Internet permits

cost effective use by smaller enterprises
(EDI lite)

Source: Forrester Research Inc., Nov. 1998

Facts and figures

b2c is a small share of Internet commerce
US Internet Commerce, 1998-2003
100%
90%

84%

86%

88%

92%

91%

92%

80%
70%
60%
US b2c
US b2b

50%
40%
30%
20%

16%

14%

12%

10%

9%

8%

8%

0%
1998

1999

2000

2001

Source: Forrester Research, Inc. (Nov. 1998)

2002

2003

Facts and figures

US direct market sales to consumers
E-commerce is a tiny share of direct market
sales

Internet sales to consumers are less than 3%

of all direct market sales to consumers (est.
1999)
Internet sales to consumers amount to less
than 4/10 of one percent of U.S. personal
consumer expenditures (est. 1999)

10

Facts and figures

Internet is a tiny % of direct market consumer sales
Value of U.S. Direct Market Driven Consumer Sales, 1998-99
800
674.0

700
612.2
Billions of dollars

600
500

Internet
Total

400
300
200
100
18

8
0
1998

1999

Sources: Direct Marketing Assoc. and Forrester Research, Inc.

11

12

Facts and figures

To date, Internet companies have small profits
Combined total from most recent financial
statements of 15 large Internet companies:*
Revenues
$5.1 billion
Net income

$-0.4 billion

*Amazon, AOL, CDnow, CompuServe, E*Trade, eBay, Excite, Infoseek,

Lycos, N2K, NetGrocer, ONsale, PeaPod, Preview, Yahoo!

13

Facts and figures

International revenues are significant for some
U.S. firms
Company

CDnow
Music Boulevard
Amazon
FirstParts
Virtual Dreams

Segment

Music
Music
Books
Components
Adult entertain.

Intl revenue (%)

Source: OECD, The Economic and Social Impact of Electronic Commerce, 1999, p. 100.

35%
33%
26%
30%
25%

14

Facts and figures

U.S.

dominance of global e-commerce

market is projected to decline

Mid-range estimates put U.S. share of global

i-commerce sales at
about

80% in 1999
declining to less than 60% in 2003.

Source Forrester Research Inc., 1998

15

Facts and figures

I-commerce Sales: U.S. as a percent of Global, 1998-2003
100%
90%
80%
70%
60%
High
Low
Middle

50%
40%
30%
20%
10%
0%
1998

1999

2000

2001

Source: Forrester Research, Inc., Nov. 1998

2002

2003

16

Facts and figures

E-commerce

is contributing to U.S.
economic growth by raising productivity

Improved supply chain management and

reduced inventory costs
Reduced distribution, marketing, and customer
service costs

The

OECD estimates b2c commerce

potentially will increase total U.S. factor
productivity by 0.50%-0.67%

17

Tax policy implications

Dont

let advocates of radical tax change

use e-commerce as a pretext.

Remote sales have been with us since at least

the Sears & Roebuck catalog
The Internet is a tiny share of remote sales, and
a negligible percentage of all consumer sales
Excluding services (which generally are not
subject to retail sales tax), most b2c Internet
sales are delivered exactly like mail order

18

Tax policy implications

The

tax system can cope with e-commerce.

Though the medium is new, the issues are old.
See Howley v. Whipple, 48 N.H. 487 (1869) in which
the court opined that writing and signatures
communicated electronically through the telegraph
were equivalent to pen and ink.1
See: Boyle, Peterson, Sample, Schottenstein, and Sprague, The Emerging International Tax
Environment for Electronic Commerce, Tax Management Memorandum, February 18, 1999.
1

19

Tax policy implications

Currently, tax

revenue losses due to

commerce (if any) are very small

Goolsbee and Zittrain (1999) estimate that sales tax

revenues are reduced by less than 1/4 of 1 percent in 1998
Less

e-

if Internet substitutes for mail order

This does does not take into account offsetting revenue

gains due to
Productivity growth

from business efficiency gains

Stock market gains spurred by e-commerce

Potential revenue loss from direct taxes also is minimal

due to current absence of profits.

20

Tax policy implications

E-commerce

highlights a number of
anomalies and weaknesses in tax systems

Federal and state telecommunications taxes

have become outdated due to deregulation and
convergence of technologies
The current system is too complex
30,000

potential sales tax jurisdictions in US!

Forexia case (UK VAT). Delivery of a newsletter

as a hard copy vs. e-mail or fax.
Jurisdictions must coordinate to avoid doubletaxation of border-crossing transactions

21

Tax policy implications

Market-driven

technological developments will

provide tools for assuring tax compliance

Many software manufacturers and e-business

merchants would like to be able to identify clients
uniquely.1

Tax administration should follow, not lead, technological

development of e-commerce.
Business participation in development of tax standards is
essential.

PricewaterhouseCoopers, E-business Technology Forecast, 1999, p. 192.

22

Tax policy implications

E-commerce

technology has the potential to

dramatically lower costs of business to tax
administrator (b2a) transactions

Electronic tax registration

Electronic tax filing and payment
Dissemination of tax information on government
web sites

23

Tax policy implications

Tax administrators fears

that electronic
records are more easily altered are without
foundation.

For commercial reasons, firms must ensure the

security and integrity of their electronic
transactions and records
Sophisticated auditing procedures are being
developed for use by internal and external
auditors, who must satisfy themselves of the
integrity of electronic systems and records.1

PricewaterhouseCoopers, The Technologies of Electronic Commerce: The Integrity of Electronic

Transactions and Digital Records for Tax Administration and Compliance, prepared for the Electronic
Commerce Tax Study Group (August 1998).
1

24

Tax policy implications

Tax authorities

should not discourage new

technology to protect familiar ways of doing
business.

Such measures will reduce potential productivity

and national income gains.

U.S.

and foreign tax authorities should

recognize that U.S. dominance of
e-commerce is transient.

Discriminatory application of VAT and other taxes

will slow efficiency gains.
OECD is seeking to build consensus among
member states and developing countries.

25

Tax policy implications

Neutral

application of tax rules and

government regulation is critical

Convergence of technologies is causing

companies to cross industry boundaries (e.g.,
broadcasting over the web)
Some products can be supplied in tangible or
intangible form (digital goods), but government
regulations may treat these differently

26

Principles to guide tax policy

Commissions deliberations

should be
guided by four basic tax policy principles:
1. Neutrality
2. Simplicity
3. Free trade
4. Technological efficiency

27

Principles to guide tax policy

1. Neutrality

E-commerce should not be taxed at a higher rate

than economically similar transactions conducted
through traditional methods.
As

a corollary, E-commerce transactions should not be

subject to special taxes that dont apply generally.

E-commerce should not be held to a higher (and

more expensive) standard of compliance than
traditional forms of commerce.
Tax administrators should respect the privacy of
e-commerce transactions to the same extent as
traditional commerce.

28

Principles to guide tax policy

2. Simplicity

Simplifying current tax systems will ease

technological solutions to collecting tax on the
net.
Jurisdictions

should harmonize the classification of

goods and services, within both retail sales and VAT
systems, and limit the number of tax rates.

The application of current law to e-commerce

should be clarified where necessary.

Tax authorities should use e-commerce

technology to reduce compliance costs.

29

Principles to guide tax policy

3. Free trade

E-commerce imports should not be taxed more

heavily than similar domestic supplies.
Double taxation (by the country of export and the
country of import) should be avoided.
On-line provision of services and digitized goods
should remain duty free.
Consistent

with U.S. policy seeking to reduce tariff and

non-tariff barriers to trade.
Consistent with current tariff schedules and customs
procedures that are applicable only to commodities.

30

Principles to guide tax policy

4. Technological efficiency

Taxes should not interfere with the development

of efficient, market-driven e-commerce
technologies and business models.
This tax policy strategy will minimize compliance
costs and maximize efficiency.

31

Conclusion

There is no support for Chicken Little claims that the tax

system is hemorrhaging as a result of
e-commerce.
Nor is the healthy development of e-commerce
dependent on a perpetual tax moratorium.
Rather, the Commission should seek:

Neutral taxation of alternative methods of conducting similar

transactions.
Simplification, so taxes can be collected at reasonable cost from
both small and big businesses
Utilization of e-commerce technology by tax authorities to lower
compliance costs.