(originally published in October 1997)

Zak Muscovitch


This paper is included in the First Monday Special Issue #3: Internet banking, e-money, and Internet gift economies, published in December 2005. Special Issue editor Mark A. Fox asked authors to submit additional comments regarding their articles.
When I originally wrote this paper in late 1996, the Internet was not the mainstream, robust medium that it is today. The Internet was thought of as a novelty of sorts and was frequently referred to as the “Information Superhighway”, a term that sounds somewhat campy today. Furthermore, the “Internet” had to be defined and described in the paper because many readers were not familiar with what the Internet actually was. As far as I am aware, this was the first published paper that addressed the topic of taxation of internet commerce.
It was truly a new frontier. The paper likened the Internet to the Silk Roads of China and coined the phrase, “The New Silk Road” to describe the Internet not as merely a new communications tool, but a new channel for the exchange of a new commodity - information.
With Internet Commerce at its infancy there were real questions looming as to whether it would take hold as a viable “trade route” and become a fixture in the marketplace, and if so, ‘who would regulate it’, if it was possible to regulate it at all. The paper envisioned the displacement of traditional means of payment in favour of “digital cash”, however this prediction proved to be inaccurate. Credit cards continue to be the most common means of paying for goods and services on the Internet, and traditional banks are now also participating through direct withdrawals from bank accounts.
At the time, it appeared that the Internet was “ungovernable”, and accordingly traditional taxation would be impossible to enforce. At the time, there was serious discussion of a “bit tax” or an “access tax”. As it turned out, this form of taxation never took hold, in part helped by the passing of an Internet Tax Moratorium by the U.S. Congress in 1998.
Traditional bricks and mortar business together with virtual businesses have tended to model themselves on the mail-order business, with taxes being levied on purchasers who reside in the same state or province as the seller, but additional forms of taxation targeted at Internet Commerce alone have not been enacted. Nevertheless, import duties have of course been avoided completely for intangible consumer products such as software and music files.
Some businesses however, primarily online casinos, have located themselves in tax haven jurisdictions and have accordingly avoided corporate taxes. For example, corporations located on-shore that are involved in the internet casino business have structured their affairs so that they reap revenues not from wagers, but from licensing fees and software development.
Residency of individuals for income tax purposes has not been significantly affected by the advent of Internet Commerce. Whereas the paper envisioned residency becoming “meaningless” on the Internet, traditional understandings of the residency of individuals for tax purposes has remained largely intact. Likewise, the location that a web site is hosted at is largely ignored when determining residency of an Internet-based business.
The advent of the Internet has affected the way many business structure their affairs and has caused certain “losses” of “traditional” taxation revenue, but the Internet apparently has not caused a wholesale revision to traditional principles of and approaches to traditional taxation. Reluctance to enact new “Internet taxes” combined with practical obstacles to collection of taxes on inter-jurisdictional internet commerce has allowed the Internet to flourish as a viable new trade route.
This paper analyzes how commerce and banking will be affected by the Internet, with particular attention to existing international frameworks for taxation. Domestic tax laws are shown to be unable to adequately control the emergence of a "new international trade route". Individual and Corporate Residency laws, Tax Avoidance and Evasion, Laundering, Crossborder-Shopping, and the Transfer of Technology will be discussed in relation to taxation laws, particularly the United States' and Canada's.

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DOI: http://dx.doi.org/10.5210/fm.v0i0.1510

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