DOCSLIB.ORG

Overview of Internet Taxation Issues

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Overview of Internet Taxation Issues Reproduced with permission from BNA’s Internet Law Resource Center™, Copyright 2014, The Bureau of National Affairs, Inc. (800-372-1033) www.bna.com. Overview of Internet Taxation Issues ANNETTE NELLEN, CPA, ESQ. COLLEGE OF BUSINESS, SAN JOSE STATE UNIVERSITY Annette Nellen, CPA, CGMA, Esq., is a professor in and director of the Masters of Science in Taxation (MST) program at San Jose State University’s College of Business. She teaches courses on tax research, accounting methods, property transactions, high technology tax issues, state taxation, ethics, tax policy, and tax reform. Prior to joining SJSU, she worked for the IRS and Ernst & Young LLP. Professor Nellen is the author of a BNA Portfolio, Amortization of Intangibles (#533). Professor Nellen is an active blogger at the 21st Century Taxation website (http://www.21stcenturytaxation.com). Professor Nellen is an active member of the tax sections of the AICPA, ABA, and California Bar. She is a graduate of CSU Northridge, Pepperdine University, and Loyola Law School. Table of Contents I. Scope and Content of the Portfolio ................................................................... 2 II. Overview to Types of Internet-Related Tax Issues ......................................... 3 A. Considerations in Understanding Internet Taxation Issues ....................... 3 B. Why the Internet Raises Tax Issues ........................................................... 8 C. How the Internet and E-Commerce Challenge a Specific Longstanding Tax - Sales and Use Tax ...................................................... 12 D. Issues Per Level of Government .............................................................. 13 III. Sales and Use Tax ........................................................................................ 14 A. Introduction ............................................................................................. 14 B. Nature of the Tax ..................................................................................... 14 C. Checklist for Applying the Tax to Internet-related Transactions ............. 15 D. Gathering the Facts .................................................................................. 15 E. Understanding the Jurisdiction's Tax Base .............................................. 16 F. Nexus / Jurisdiction to Tax ...................................................................... 19 G. Who Is Required to Collect Sales and Use Tax ....................................... 43 H. Where the Transaction Is Taxable - Sourcing Rules ............................... 44 I. Sales and Use Tax Complexity ................................................................. 46 J. Compliance Considerations ...................................................................... 48 IV. Federal Income Tax ..................................................................................... 49 A. Introduction ............................................................................................. 49 B. Income ..................................................................................................... 50 © 2014, The Bureau of National Affairs, Inc. 1 INTERNET LAW RESOURCE CENTER™ C. Inventory .................................................................................................. 51 D. Transfers of Software and Cloud Transactions ........................................ 53 E. Software Development and the Section 199 Deduction ........................... 55 F. Website Development Costs .................................................................... 57 G. Transfers of Domain Names .................................................................... 60 H. Virtual Economy and Virtual Currency Considerations .......................... 63 I. Audits and Documentation ........................................................................ 65 J. Information Reporting .............................................................................. 66 V. State Income Tax ........................................................................................... 66 A. Introduction ............................................................................................. 66 B. Nexus ....................................................................................................... 67 C. Spreading Multistate Income Among the States ...................................... 70 D. Incentives ................................................................................................ 72 VI. Other Taxes .................................................................................................. 73 A. Foreign Taxes .......................................................................................... 73 B. Payroll Taxes ........................................................................................... 74 C. Property Taxes ......................................................................................... 74 D. Business License Taxes ........................................................................... 75 E. Transient Occupancy Taxes ..................................................................... 75 F. New Tax Possibilities ............................................................................... 75 VII. Conclusion .................................................................................................. 76 Worksheet A: Cloud Computing Guidance from the States (links) ................... 76 Worksheet B: Deal-of-the-Day Guidance from the States (links) ...................... 78 Worksheet C: Nexus Checklist for Sales and Use Tax ...................................... 79 Worksheet D: Nexus Checklist for State Income Tax ....................................... 79 Worksheet E: State Sales and Use Tax Actions ................................................. 80 Worksheet F: Early E-Commerce/Internet Taxation Studies and Proposals ....................................................................................... 81 I. Scope and Content of the Portfolio The Internet and its use for many types of business and personal transactions raise a variety of tax issues for taxpayers, practitioners, legislators, and tax agencies. Despite the prevalence of Internet use for business transactions for well over a decade, Internet and web-based transactions and assets continue to challenge tax rules that have not been updated for a world where borders and tangible goods are not the focal points. Legislatures and tax agencies struggle to understand the nature of web-based transactions, new ways of doing business, and whether and how existing tax rules should be modified to effectively and appropriately apply to Internet transactions. Also, Internet- based transactions and business models continue to evolve, continually challenging tax rules and proposed changes. The changes require lawmakers, tax auditors, and tax practitioners to also understand the technology and transactions in order to apply tax rules correctly or to even know if existing rules require modification. This portfolio provides an overview to why tax issues exist in the e-commerce business model. In addition, the basics of state and federal tax rules and principles relevant to Internet and web-based transactions and activities are explained along with selected current developments that sometimes bring clarity, but can also increase the confusion due to sometimes conflicting rulings or varying technologies underlying seemingly similar transactions. Areas of the tax law that pose the most significant challenges—nexus determinations and nature of the transaction, among others—are covered. Finally, this portfolio summarizes some of the actions and reports on Internet, cloud 2 © 2014, The Bureau of National Affairs, Inc. OVERVIEW OF INTERNET TAXATION ISSUES computing, and e-commerce taxation from legislatures, government agencies, and others to provide a sense of the ideas offered to address issues raised by new ways of doing business. The term “Internet transactions” is used throughout this essay for convenience. Consider that for this essay, the term includes all technology elements of the Internet (including telecommunications), web-based transactions and operations, cloud computing, and e-commerce. This portfolio is divided into the following broad topics: A. Overview to Types of Internet-Related Tax Issues B. Sales and Use Tax C. Federal Income Tax D. State Income Tax E. Other Taxes II. Overview to Types of Internet-Related Tax Issues This section explains why the Internet and web-based transactions generate tax issues, and the nature of these issues. A. Considerations in Understanding Internet Taxation Issues Listed and explained below are seven considerations for understanding and evaluating Internet taxation issues, and the challenges and approaches for resolving them. 1. Many of the issues are not entirely new ones One of the biggest tax concerns of state and local governments regarding the Internet is the potential loss of sales and use tax revenues. This is not a new problem though. In 1992, the U.S. Supreme Court confirmed an earlier ruling (Nat’l Bellas Hess, Inc. v. Dep’t of Revenue of the State of Ill., 1 ILR 853, 386 U.S. 756 (1967)), that a vendor must have a physical presence in a state in order for the state to require the vendor to collect sales and use tax from its customers in the state (Quill Corp. v. North Dakota, 2 ILR 242, 504 U.S. 298 (1992)). The issue involved was whether sufficient “nexus” existed between
Load more

Recommended publications
  • Chapter 8: Exemptions and Exclusions
    Contents Chapter 8: Exemptions and Exclusions ........................................................................................... 87 Exempt Sales of Services ............................................................................................................... 87 1. Medical, Dental, and Allied Health Services ................................................................... 88 2. Legal Services ..................................................................................................................... 89 3. Educational Services .......................................................................................................... 89 4. Services Rendered by Nonprofit Membership Organizations ..................................... 91 5. Domestic Services Provided in Private Households ...................................................... 91 6. Nonprofit Educational and Research Agencies.............................................................. 92 7. Services by Religious and Charitable Organizations ..................................................... 92 8. Accounting, Auditing, and Bookkeeping Services .......................................................... 93 9. Public Utilities ..................................................................................................................... 93 10. Banking and Related Functions ................................................................................... 95 11. Insurance Services .......................................................................................................
    [Show full text]
  • Itep Guide to Fair State and Local Taxes: About Iii
    THE GUIDE TO Fair State and Local Taxes 2011 Institute on Taxation and Economic Policy 1616 P Street, NW, Suite 201, Washington, DC 20036 | 202-299-1066 | www.itepnet.org | [email protected] THE ITEP GUIDE TO FAIR STATE AND LOCAL TAXES: ABOUT III About the Guide The ITEP Guide to Fair State and Local Taxes is designed to provide a basic overview of the most important issues in state and local tax policy, in simple and straightforward language. The Guide is also available to read or download on ITEP’s website at www.itepnet.org. The web version of the Guide includes a series of appendices for each chapter with regularly updated state-by-state data on selected state and local tax policies. Additionally, ITEP has published a series of policy briefs that provide supplementary information to the topics discussed in the Guide. These briefs are also available on ITEP’s website. The Guide is the result of the diligent work of many ITEP staffers. Those primarily responsible for the guide are Carl Davis, Kelly Davis, Matthew Gardner, Jeff McLynch, and Meg Wiehe. The Guide also benefitted from the valuable feedback of researchers and advocates around the nation. Special thanks to Michael Mazerov at the Center on Budget and Policy Priorities. About ITEP Founded in 1980, the Institute on Taxation and Economic Policy (ITEP) is a non-profit, non-partisan research organization, based in Washington, DC, that focuses on federal and state tax policy. ITEP’s mission is to inform policymakers and the public of the effects of current and proposed tax policies on tax fairness, government budgets, and sound economic policy.
    [Show full text]
  • Internet Tax Freedom Act Expiration
    GIL 1-14-2 Sales and Use Tax: Internet Tax Freedom Act Expiration This guidance document is advisory in nature but is binding on the Nebraska Department of Revenue (Department) until amended. A guidance document does not include internal procedural documents that only affect the internal operations of the Department and does not impose additional requirements or penalties on regulated parties or include confidential information or rules and regulations made in accordance with the Administrative Procedure Act. If you believe that this guidance document imposes additional requirements or penalties on regulated parties, you may request a review of the document. This guidance document may change with updated information or added examples. The Department recommends you do not print this document. Instead, sign up for the subscription service at revenue.nebraska.gov to get updates on your topics of interest. August 22, 2014 Dear XXXX: This correspondence is in response to your August 8, 2014 letter regarding the Internet Tax Freedom Act. Based upon the nature of your request, we are providing this General Information Letter (GIL). This GIL will be published on the Nebraska Department of Revenue’s (Department) website with all identifying taxpayer information redacted. GILs address general questions, provide analysis of issues, and direct taxpayers to the Nebraska statutes, Department regulations, revenue rulings, or other sources of information to help answer a question. A GIL is a statement of current Department policy, and taxpayers may rely on the Department to follow the principles or procedures described in a GIL until it is rescinded or superseded. You may also find current regulations, revenue rulings, information guides, taxpayer rulings, and other GILs at revenue.nebraska.gov that may be helpful to you.
    [Show full text]
  • States Consider Digital Taxes Amidst Conflicting Rationales
    States Consider Digital Taxes Amidst Conflicting Rationales FISCAL Jared Walczak FACT Vice President of State Projects No. 763 May 2021 Key Findings · Digital advertising, social media, and data tax proposals have been introduced in nine states following enactment of Maryland’s digital advertising tax, which has since been postponed a year due to administrative and legal challenges. · Motivations for these taxes vary, from misperceptions that there is currently a tax loophole to a belief that technology and social media companies merit an extra layer of taxation, either because of their large profits or as a response to their content moderation policies. · These taxes are administratively complex, constitutionally dubious, and likely violative of the Permanent Internet Tax Freedom Act. · Much of the cost of these taxes will be borne by in-state companies and individuals. · Lawmakers should be extremely cautious about using taxation to target specific industries over disagreements about those industries’ policies or practices and should reflect on the justifications for these taxes. The Tax Foundation is the nation’s leading independent tax policy research organization. Since 1937, our research, analysis, and experts have informed smarter tax policy at the federal, state, and global levels. We are a 501(c)(3) nonprofit organization. ©2021 Tax Foundation Distributed under Creative Commons CC-BY-NC 4.0 Editor, Rachel Shuster Designer, Dan Carvajal Tax Foundation 1325 G Street, NW, Suite 950 Washington, DC 20005 202.464.6200 taxfoundation.org TAX FOUNDATION | 2 Introduction Across the country, policymakers of both parties have developed a strong interest in taxing large technology companies through digital advertising taxes, social media taxes, and data taxes.
    [Show full text]
  • E-Commerce: Recent Developments in State Taxation of Online Sales
    ISSUE BRIEF 07.13.17 E-Commerce: Recent Developments in State Taxation of Online Sales Joyce Beebe, Ph.D., Fellow in Public Finance Online retail giant Amazon recently identified by OECD, e-commerce is defined announced that it would voluntarily start broadly as “the sale or purchase of goods collecting sales taxes in four additional or services, conducted over computer states—Hawaii, Idaho, Maine, and New networks by methods specifically designed Mexico—making the company a nationwide for the purpose of receiving or placing state sales tax collector.1 This marks the orders.”4 If further segregating it by sales culmination of an interesting evolution of channels, there are business-to-business company policy, because until recently, (B2B), business-to-consumer (B2C), and Amazon was one of the fiercest opponents consumer-to-consumer (C2C) models of of online sales tax.2 Some observers have e-commerce. Despite the public’s familiarity suggested that this signifies a change in with B2C or C2C models, B2B is the largest Amazon’s business model over the last among the three in terms of total sales. few years. Its early success was partly Widespread access to the internet attributable to keeping online purchases tax contributes significantly to the growth of free; however, in recent years, Amazon has e-commerce. Other factors, such as the distinguished itself by offering faster and development of technically sophisticated expedited deliveries through services such online platforms and the proliferation of as Amazon Prime and Amazon Prime Air. mobile devices, further enhance buyers’ A 2015 estimate shows that, on average, online purchasing experiences.5 According Amazon Prime shoppers spent about $700 to the U.S.
    [Show full text]
  • Nebraska's Tax Modernization Committee
    REPORT TO THE Balancing the Scales: LEGISLATURE: LR155 – A Comprehensive Review of Nebraska’s State-Local Revenue NEBRASKA’S TAX System MODERNIZATION COMMITTEE (2013) 0 TABLE OF CONTENTS I. Acknowledgements, Overview and Executive Summary a) Members of the Committee b) Acknowledgments c) Overview i. LR155 Requirements ii. Tax Modernization Committee - Structure and Process iii. Public Meetings and Public Hearings d) Executive Summary II. Overview of Nebraska’s Tax System a) Characteristics of a Balanced and Moderate State and Local Revenue System i. Balance ii. Revenue Diversification iii. Tax Fairness iv. Stability and Moderation v. State Fiscal Equalization vi. Political Accountability vii. Property Tax Equity viii. Tax Competitiveness III. Observations and Findings a) Property Tax i. History ii. Building the Base iii. Review and Comparison iv. Findings b) Income Taxes i. Nebraska’s Individual Income Tax: Building the Base ii. The Syracuse and Burling Studies iii. Review and Comparison iv. Social Security and Other Retirement Income v. Nebraska’s Corporate Income Tax: Building the Base i vi. Review and Comparison vii. Findings c) Sales and Use Taxes i. Building the Base ii. Review and Comparison iii. Sales Taxes and the Internet iv. Findings IV. Recommendations and Items for Further Study a) Property Tax b) Income Tax c) Sales and Use Tax V. Appendix ii TAX MODERNIZATION COMMITTEE MEMBERS: Sen. Galen Hadley, Kearney, District 37 – Chair Chair, Revenue Committee Sen. Paul Schumacher, Columbus, District 22 – Vice-Chair Vice-Chair, Revenue Committee Sen. Kate Sullivan, Cedar Rapids, District 41 Chair, Education Committee; Revenue Committee Sen. Heath Mello, Omaha, District 5 Chair, Appropriations Committee Sen.
    [Show full text]
  • Internet Tax Freedom Act to Extend the Moratorium on Certain Taxes Relating to the Internet and to Electronic Commerce
    H. R. 3678 One Hundred Tenth Congress of the United States of America AT THE FIRST SESSION Begun and held at the City of Washington on Thursday, the fourth day of January, two thousand and seven An Act To amend the Internet Tax Freedom Act to extend the moratorium on certain taxes relating to the Internet and to electronic commerce. Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, SECTION 1. SHORT TITLE. This Act may be cited as the ‘‘Internet Tax Freedom Act Amend- ments Act of 2007’’. SEC. 2. MORATORIUM. The Internet Tax Freedom Act (47 U.S.C. 151 note) is amended— (1) in section 1101(a) by striking ‘‘2007’’ and inserting ‘‘2014’’, and (2) in section 1104(a)(2)(A) by striking ‘‘2007’’ and inserting ‘‘2014’’. SEC. 3. GRANDFATHERING OF STATES THAT TAX INTERNET ACCESS. Section 1104 of the Internet Tax Freedom Act (47 U.S.C. 151 note) is amended by adding at the end the following: ‘‘(c) APPLICATION OF DEFINITION.— ‘‘(1) IN GENERAL.—Effective as of November 1, 2003— ‘‘(A) for purposes of subsection (a), the term ‘Internet access’ shall have the meaning given such term by section 1104(5) of this Act, as enacted on October 21, 1998; and ‘‘(B) for purposes of subsection (b), the term ‘Internet access’ shall have the meaning given such term by section 1104(5) of this Act as enacted on October 21, 1998, and amended by section 2(c) of the Internet Tax Nondiscrimina- tion Act (Public Law 108–435).
    [Show full text]
  • Turkey’S Digital Services Tax
    OFFICE of the UNITED STATES TRADE REPRESENTATIVE EXECUTIVE OFFICE OF THE PRESIDENT Section 301 Investigation Report on Turkey’s Digital Services Tax January 6, 2021 Contents I. Executive Summary ................................................................................................................ 3 II. Relevant Background and Context ...................................................................................... 6 A. Turkey’s Adoption of the DST in the Midst of Ongoing, Multilateral Negotiations Regarding Digital Services Taxes ............................................................................................... 6 B. USTR’s Investigation of Turkey’s DST Pursuant to Section 301 of the Trade Act ........ 7 1. Relevant Legal Provisions in Section 301 .................................................................... 7 2. The Focus of USTR’s Investigation ............................................................................. 8 3. USTR’s Investigatory Process ...................................................................................... 8 III. Description of Turkey’s Digital Services Tax ..................................................................... 9 A. The DST’s Tax Rate ......................................................................................................... 9 B. Companies Subject to the DST ...................................................................................... 10 C. Services Subject to the DST ..........................................................................................
    [Show full text]
  • 2016 TN Sales and Use Tax Guide
    Tennessee Sales and Use Tax Guide August 2016 SALES AND USE TAX Dear Tennessee Taxpayer, This sales and use tax guide is intended as an informal reference for taxpayers who wish to gain a better understanding of Tennessee sales and use tax requirements. It is not an all- inclusive document or a substitute for Tennessee sales or use tax statutes or rules and regulations. The information in this guide is current as of the date of publication. Tax laws, their interpretation, and their application can change due to legislative action, reviews, and court decisions. Periodically, registered taxpayers are mailed information letters with updates on tax laws and policies. Be sure to read any letter you receive carefully; this information may save you time and money. Informational publications are also available for specific industries. Contact the Taxpayer Services Division to obtain these publications. The Department of Revenue offers a toll-free tax information line for Tennessee residents. The number is (800) 342-1003. If calling from Nashville or outside Tennessee, you may call (615) 253-0600. The Department of Revenue also offers a telecommunications device for the deaf (TDD) line at (615) 741-7398. If you have questions, please do not hesitate to contact any of the offices listed below. Sincerely, Taxpayer Services Division Tennessee Department of Revenue Toll-Free: (800) 342-1003 Taxpayer Services Division Out-of-State: (615) 253-0600 Andrew Jackson Building TDD: (615) 741-7398 500 Deaderick Street Nashville, Tennessee 37242-1099 Regional Offices Memphis: Chattanooga: Jackson: 3150 Appling Road 1301 Riverfront Parkway Lowell Thomas State Office Bldg Bartlett, TN 38133 Suite 203 225 Dr.
    [Show full text]
  • State Taxation of Internet Transactions
    State Taxation of Internet Transactions Steven Maguire Specialist in Public Finance May 7, 2013 Congressional Research Service 7-5700 www.crs.gov R41853 CRS Report for Congress Prepared for Members and Committees of Congress State Taxation of Internet Transactions Summary The United States Bureau of the Census estimated that $4.1 trillion worth of retail and wholesale transactions were conducted over the Internet in 2010. That amount was 16.1% of all U.S. shipments and sales in that year. Other estimates, based on different data, projected the 2011 so- called e-commerce volume at approximately $3.9 trillion. The volume, roughly $4 trillion, of e- commerce is expected to increase, and state and local governments are concerned because collection of sales taxes on these transactions is difficult to enforce. Under current law, states cannot reach beyond their borders and compel out-of-state Internet vendors (those without nexus in the buyer’s state) to collect the use tax owed by state residents and businesses. The Supreme Court ruled in 1967 that requiring remote vendors to collect the use tax would pose an undue burden on interstate commerce. Estimates put this lost state tax revenue at approximately $11.4 billion in 2012. Congress is involved because interstate commerce typically falls under the Commerce Clause of the Constitution. Opponents of remote vendor sales and use tax collection cite the complexity of the myriad state and local sales tax systems and the difficulty vendors would have in collecting and remitting use taxes. Proponents would like Congress to change the law and allow states to require out-of-state vendors without nexus to collect state use taxes.
    [Show full text]
  • Wireless Tax Burden Remains High Due to Federal Surcharge Increase
    Wireless Tax Burden Remains High Due to Federal Surcharge Increase FISCAL Scott Mackey Ulrik Boesen FACT Managing Partner, Senior Policy Analyst, No. 732 Leonine Public Affairs LLP Excise Taxes Nov. 2020 Key Findings • A typical American household with four phones on a “family share” plan, paying $100 per month for taxable wireless service, can expect to pay about $270 per year in taxes, fees, and surcharges—up from $260 in 2019. • Nationally, these impositions make up about 22.6 percent of the average bill—the highest rate ever. Illinois has the highest wireless taxes in the country at 32.2 percent, followed by Arkansas at 30.0 percent, Washington at 29.7 percent, Nebraska at 29.1 percent, and New York at 28.6 percent. • Since 2008, average monthly wireless service bills per subscriber have dropped by 26 percent, from $50 per line to about $37 per line. However, wireless taxes have increased by 50 percent, from 15.1 percent to 22.6 percent of the average bill. • At the end of 2019, over 67 percent of low-income adults had wireless as their phone service, and 58 percent of all adults were wireless-only. Excessive taxes and fees, especially the very high per-line charges, impose a disproportionate burden on low-income consumers. In Chicago, a family with four lines of taxable wireless service paying $100 per month is subjected to over $500 per year in taxes and fees. The Tax Foundation is the nation’s leading independent tax policy research organization. Since 1937, our research, analysis, and experts have informed smarter tax policy at the federal, state, and global levels.
    [Show full text]
  • Tax Theory Applied to the Digital Economy: a Proposal for a Digital Data Tax and a Global Internet Tax Agency
    Tax Theory Applied to the Digital Economy: A Proposal for a Digital Data Tax and a Global Internet Tax Agency Tax Theory Applied to the Digital Economy: A Proposal for a Digital Data Tax and a Global Internet Tax Agency Cristian Óliver Lucas-Mas and Raúl Félix Junquera-Varela © 2021 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 24 23 22 21 This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy, completeness, or currency of the data included in this work and does not assume responsibility for any errors, omissions, or discrepan- cies in the information, or liability with respect to the use of or failure to use the information, methods, processes, or conclusions set forth. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorse- ment or acceptance of such boundaries. Nothing herein shall constitute or be construed or considered to be a limitation upon or waiver of the privileges and immunities of The World Bank, all of which are specifically reserved. Rights and Permissions This work is available under the Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO) http:// creativecommons.org/licenses/by/3.0/igo.
    [Show full text]