Taxation and electronic commerce.

The Treasury Department has taken an important early step in examining how the explosive growth in communications technology and electronic commerce, including the Internet, may affect U.S. and international tax policy. Its November 1996 paper, Selected Tax Policy Implications of Global Electronic Commerce, said new taxes should not be imposed on electronic commerce; rather, existing concepts and administrative systems should be adapted to new ways of doing business, while ensuring that tax systems treat similar income equally, regardless of whether it is earned through electronic means or through more traditional channels. Even so, the Treasury projected that transactions in cyberspace will accelerate the current trend toward residence-based taxation and away from traditional source-based taxation.

The paper examined substantive tax policy issues, such as how one determines whether a business is subject to a country's tax jurisdiction. Such nexus issues concern both U.S. tax jurisdiction and the tax treaty concept of "permanent establishment." In addition, the paper addressed compliance concerns, in particular those associated with electronic money, identity verification, record keeping and information reporting.

The paper is available via the Internet at http://www.ustreas.gov. Comments should be sent by e-mail to Joseph H. Guttentag, the Treasury's international tax counsel, at [e-mail] (subject: technology issues).

Observation: The paper said the decentralized, borderless nature of electronic commerce casts doubt on the continuing relevance of tax concepts that consider where income is earned rather than the residence of the earner. The paper also said U.S. tax policy had already recognized that as traditional source principles lose their significance, residence-based taxation could step in and take their place.

This assertion has drawn criticism from state tax officials, who are eager to preserve apportionment based largely on where business income is earned, measured increasingly by sales. It also should concern multinational businesses, particularly in light of new tax proposals in President Clinton's budget package. The administration would replace the longstanding 50-50 default rule for allocating export income between domestic production and foreign sales activities with an allocation based on "actual economic activity." --Tracy Hollingsworth, Esq., staff director of tax councils at Manufacturers Alliance, Arlington, Virginia.