# DU SOL B.Com 3rd Year E-Commerce Notes Chapter 5 Laws Relating to Online Transactions

## DU SOL B.Com 3rd Year E-Commerce Notes Chapter 5 Laws Relating to Online Transactions

Question 1.
What do you understand by Cyber laws? Describe its Aims & Salient Provisions.
So much is available on the computers that the eagerness to sabotage is high. To avoid these so called hackers, who spoil the show, we have the Cyber laws. It is a very wide term that includes –

1. computers
2. computer networks
3. the Internet
4. data
5. software etc.

Cyber law includes laws relating to –

1. Electronic and Digital Signatures
2. Computer Crime
3. Intellectual Property
4. Data Protection and Privacy
5. Telecommunications Laws

Let us discuss each of them in brief:
Electronic and Digital Signature Laws. Electronic Signatures especially Digitally Signatures are fast becoming the de-facto standard for authentication of electronic records, Electronic Data Interchange, Emails etc. Comprehensive laws are required so that uniform standards and procedures can be established.

These laws relating to Electronic Signatures e.g. the Electronic Signatures in Global and National Commerce Act of the USA are part of cyber law.

Computer Crime Law: Our governing dependence on computers and the Internet has made us all potential victims of Internet threats.

Some countries have enacted legislations that especially deal with computer crime and yet others have adapted their existing laws to make computer crime an offence under existing statutes.

Intellectual Property Law: Cyber law covers the intellectual property laws that relate to cyber space and its constituents.

This includes –

1. Copyright law in relation to computer software, computer source code etc.
2. Trademark law in relation to domain names
3. Semiconductor law which relates to the protection of Semiconductor Design and Layouts
4. Patent Law in relation to computer hardware and software.

Data Protection and Privacy laws many nations have enacted legislation relating to data protection and privacy within their jurisdictions. It is pertinent to note that due to the nature of the Internet and the amount of information that may be accessed through it, such legislation is critical to protect the fundamental rights to privacy of an individual.
These laws would probably play a vital role, as the dependence of insecure networks such as the Internet grows further.

Telecommunication Laws: As has been seen above cyberspace does not only include the Internet and computes, but is present where two or more cables or wires etc. meet. Telecommunications systems also call within the ambit of cyber space and therefore would form an integral part of cyber laws. The word cyber and its relative dot.com pare probably the most commonly used terminologies of the modern era.

In the information age the rapid development of computers, telecommunications and other technologies has led to the evolution of new forms of trans-national crimes known as “cyber crimes”. They may be defined as “any crime with the help of computer and telecommunication technology”, with the purpose of influencing the functioning of computer or the computer systems.

The extent of loss involved worldwide of cyber crimes is tremendous as it is estimated that about 500 million people who use the Internet can be affected by the emergence of cyber crimes. Cyber crimes are a very serious threat for the times to come and pose one of the most difficult challenges before the law enforcement machinery.

Most cyber crimes do not involve violence but rather greed, pride or play on some character weakness of the victims. It is difficult to identify the culprit, as the Net can be a vicious web of deceit and can be accessed from any part of the globe. For these reasons, cyber crimes are considered as “white-collar crimes”. To understand cyber crime as a significantly new phenomenon, with potentially profoundly new consequences, it is necessary’ to recognize it as a constituent aspect of the wider political, social and economic reconstructing currently effecting counties worldwide.

This new technology not only provides opportunities for the profitable development of an international information market but has also raised the specter of new criminal activities to exploit them. The very technology that enables multinationals to do business more effectively and challenge the individual controls and regulations of nation states, also offers the prospect of globally organized criminal networks.

Moreover the free flow of uncensored information on electronic networks and web-sites is an attractive Just as crimes have changed with the growth of information technology so have the categories of criminals who engage in such crimes. There are three basic categories of criminals who engage in such crimes, ranging from hackers, information merchants and mercenaries, to terrorists, extremists and deviants.

The types of Cyber Crimes: The following are the possible cyber crimes.

Hacking: It is the most common type of Cyber crime being committed across the world. Hacking has been defined in section 66 of the Information Technologies Act, 2000 as follows “whoever with the intent to cause or knowing that he is likely to cause wrongful loss or damage to the public or any person destroys or deletes or alters any information residing in a computer resource or diminishes its value or utility or affects it injuriously by any means commits hacking”.

Punishment for hacking under the above mentioned section is imprisonment for three years or fine which may extent to two lakh rupees or both. A Hacker is a person who breaks in or trespasses a computer system. Hackers are of different types ranging from code hackers to crackers to cyber punks to freaks. Some hackers just enjoy cracking systems and gaining access to them as an ordinary pastime; they do not desire to commit any further crime. Whether this itself would constitute a crime is a matter of fact. At most such a crime could be equated with criminal trespass.

Security Related Crimes: With the growth of the internet, network security has become a major concern. Private confidential information has become available to the public. Confidential information can reside in two states on the network. It can reside on the physical stored media, such as hard drive or memory or it can reside in the transit across the physical network wire in the form of packets. These two information states provide opportunities for attacks from users on the internal network, as well as users on the Internet.

Network Packet Sniffers: Network computers communicate serially where large information pieces are broken into smaller ones. The information stream would be broken into smaller pieces even if networks communicated in parallel. These smaller pieces are called network packets. Since these network packets are not encrypted they can be processed and understood by any application that can pick them off the network and process them. A network protocols specifies how packets are identified and labeled which enables a computer to determine whether a packet is intended for it.

The specifications for network protocols such as TCP/IP are widely published. A third party can easily interpret the network packets and develop a packet sniffer. A packet sniffer is a software application that uses a network adapter card in a promiscuous mode (a mode in which the network adapter card sends all packets received by the physical network wire to an application for processing) to capture all network packets that are sent lacross a local network.

A packet sniffer can provide its users with meaningful and often sensitive information such as user account names and passwords.

IP Spoofing: An IP attack occurs when an attacker outside the network pretends to be a trusted computer either by using an IP address that is within its range or by using an external IP address that you trust and to which you wish to provide access to specified resources on your network. Normally, an IP spoofing attack is limited to the injection of data or commands into an existing stream of data passed between client and server application.

Password attacks: Password attacks can be implemented using several different methods like the brute force attacks, Trojan horse programmes. IP spoofing can yield user accounts and passwords. Password attacks usually refer to repeated attempts to identify a user password or account. These repeated attempts are called brute force attacks.

Distribution of sensitive internal information to external sources: At the core of these security breaches is the distribution of sensitive information to competitors or others who use it to the owners’ disadvantage. While an outside intruder can use password and IP spoofing attacks to copy information,’ an internal user could place sensitive information on an external computer or share a drive on the network with other users.

Man-in-the-middle-attacks: This attack requires that the attacker have access to network packets that come across the networks. The possible use of such attack are theft of information, hijacking an ongoing session to gain access to your internal network resources, traffic analysis to drive information about one’s own network and its users, denial of service, corruption of transmitted data and introduction of new information into network sessions.

Fraud On the Internet: This is a form of white collar crime. Internet fraud is a common type of crime whose growth has been proportionate to the growth of internet itself. The internet provides companies and individuals with the opportunity of marketing their products on the net. It is easy for people with fraudulent intention to make their messages look real and credible. There are innumerable scams and frauds most of them relating to investment schemes and have been described in detail below as follows:

Online investment newsletters: Many newsletters on the internet provide the investors with free advice recommending stocks where they should invest. Sometimes these recommendations are totally bogus and cause loss to the investors.

Bulletin boards: This is a forum for sharing investor information and often fraud is perpetrated in this zone causing loss of millions who bank on them.

E-mail scams: Since junk mail (E-mail which contains useless material) is easy to create, fraudsters often find it easy to spread bogus investment schemes or spread false information about a company.

Credit card fraud: With the electronic commerce rapidly becoming a major force in national economies it offers rich pickings for criminals prepared to undertake fraudulent activities. In U.S. A. the ten most frequent fraud reports involve undelivered and online services; damaged, defective, misrepresented or undelivered merchandise; auction sales; pyramid schemes and multilevel marketing and of the most predominant among them is credit card fraud.

Something like half a billion dollars is lost to consumers in card fraud alone. Publishing of false digital signature. According to section 73 of the l.T. Act 2000, if a person knows that a digital signature certificate is erroneous in certain particulars and sill goes ahead and publishes it. is guilty of having contravened the Act. He is punishable with imprisonment for a term that may extended to two years or with fine of a lakh rupees.

Making available digital signature for fraudulent purpose: This is an offence punishable under section 74 o the above mentioned act, with imprisonment for a term that may extend to two years or with fine of two lakh rupees or with both.

Alteration & Destruction of digital information: The corruption and destruction of digital information is the single largest menance facing the world of computers. This is introduced by a human agent with the help of various programmes which have been described in detail below as follows: virus Just as a virus can infect the human immunity system three exist programs, which can destroy or hamper computer systems.

A computer virus is a programme designed to replicate and spread, generally with the victim beging oblivious to its existence. Computer viruses spread by attaching themselves to programs like word processor or spreadsheets or they attack themselves to the boot sector of a disk. When an infected file is activated or when the computer is started form an infected disk, the virus itself is also executed.

Pornography on the net: The growth of technology has flip side to it causing multiple problems in everyday life. Internet has provided a medium for the facilitation of crimes like pornography. Cyber porn as it is popularly called is widespread. Almost 50% of the web sites exhibit pornographic material on the Internet today.

Pornographic materials can be reproduced more quickly and cheaply on new media like hard disks, floppy discs and CD-ROM’s. The new technology is not merely an extension of the existing forms like text photographs and images. Apart from still pictures and images, full motion video clips and complete movies are also available. Another great disadvantage with a media like this is its easy availability and accessibility to children who can now log on to pornographic web-sties from their own houses in relative anonymity and the social and legal deterrents associated with physically purchasing an adult magazine from the stand are no longer present.

Furthermore, there are more serious offences which have universal disapproval like child pornography and far easier for offenders to hide and propagate throught he medium of the internet.

Question 2.
Write a short note on Cyber Laws in India
India has enacted the first I.T. Act, 2000 based on the Unciral model recommended by the general assembly of the united nations by a resolution dated 30th Jan 1997. The preamble to this Act gives a very clean picture in this regard. The various offences which are provided under this chapter are:

Tampering with Computer source documents
Hacking with Computer systems
Misrepresentation
Breach of Confidentiality and Privacy
Fraud

The elementary problems, which are associated with cyber-crimes are –

1. Jurisdiction is the highly debatable issue as to the maintainability of any suits which has been filled. Today with the growing arms of cyberspace the growing arms of cyberspace the territorial boundaries seems to vanish thus the concept of territorial jurisdiction as envisaged under S.l of C.P.C and S.2. of the I.P.C. will have to give way to alternative method of dispute resolution.

2. Loss of evidence is a very common & expected problem as all the data are routenly destroyed. Further collection of data outside the territorial extent also paralyzes this system of crime investigation.

3. Cyber Army-There are also an imperative need to built a high technology crime & investigation infrastructure, with highly technical staff a the other end.

4. A law regulating the cyber-space which India has done.

5. Though S.75 provides for extra-territorial operations of this law, but they could be meaningful only when backed with provision recognizing orders and warrants for Information issued by competent authorities outside their jurisdiction and measure for cooperation for exchange of material and evidence of computer crimes between law enforcement agencies.

6. Use of incepted messages, virtually private networks etc. also create a big problem to trace the activities of cyber criminals.

7. Cyber savvy judges are the need of the day. Judiciary plays a vital role in shaping the enactment according to the order of the day. One such stage, which needs appreciation, is the P.I.L., which the Kerela High Court has accepted through an email.

8. The procedural obligation which have to be fulfilled as lettertrography U/s 166A & 166B of the Cr. P.C. and bar in case of crimes committed outside India, (i.e. prior approval of the central government.)

‘Perfect’ is a relative term. Nothing in this world is perfect. The persons who legislate the laws & by-laws also are neither perfect. The laws therefore enacted by them cannot be perfect. This law has emerged from the womb of globalization. It is at the threshold of development. In due course of exposure through varied & complicated issues it will grow to be a piece of its time legislation. The Information and Technology Act 2000 seeks to introduce some sort of control over the use of encryption for communication in India.

The use of the cryptography and encryption in India is a relatively new phenomenon. The use of this technology for the purpos’es of communication has begun only over the last 15-20 years in India. According to a recent report in India there are very few companies involved in the development of cryptography. Further, cryptography remains within the domain of the defense sector. It is only as late as 1995 that India introduced a list of items that required licensing before export. The list only included encryption software for telemetry systems in specific and did not relate to encryption software in general.

The information and Technology Act 2000 makes the publishing of information which is obscene in electronic form punishable as under:

“Whoever publishes or transmits or causes to be published in the electronic form, any material which is lascivious or appeals to the prurient interest or if its effect is such as to tend to corrupt persons who are likely, having regard to all relevant circumstances, to read, see or hear the matter contained or embodied in it, shall be punished on first conviction with imprisonment of either description for a term which may extend to five years and with fine which may extend to one lakh rupees and in the event of a second or subsequent conviction, with imprisonment of either description for a term which may extend to ten years and also with fine which may extend to two lakh rupees.” This new law will operate upon anyone who is within its jurisdiction net.

Any one within the country or the area of operation of the law who is carrying on a business of cyber porn will liable under section 67 of the above mentioned Act. Apart from this, a multi-layered governance program should be ushered in.

This will mainly include a mixture of national and international legislations and self imposed regulations by internet service providers and users like parents for their children, hotlines and special organizations to report pornographic content. In this way the balance between the freedom of the individual and the greatest good of the society can be maintained.

Question 3.
What are the Taxation issues in Electronic Commerce
As the commercialization of the Internet expands, so too inevitably will the taxation of electronic commerce. For a long time Internet users believe the Internet should remain free of governmental regulation or taxation.

According to one off-repeated Internet message: “Governments of the Industrial World, you weary giants of flesh and steel, I come from Cyberspace the new home of Mind. On behalf of the future, I ask you of the past to leave us alone. You are not welcome among us. You have no sovereignty where we gather.”

Flowever, taxation of electronic commerce is not a future issue, but a present reality. It is not surprising that state income tax laws apply to income earned from electronic commerce transactions. It is less widely known that many states also impose sales and taxes on electronic commerce transactions.

Overview of State Sales Tax Rules: Four-fifths of the states impose a sales tax on the “transmission” component of electronic commerce – the interstate telecommunications and/or intrastate telecommunications. About one-half of the states impose a sales tax on specific categories of on-line “content” such as the electronic transmission of canned software or cable television. About one-quarter of the states impose a broader-based sales tax on numerous categories of on-line “content” such as electronic information or ’ computer services. For example, Texas (USA) imposes its sales tax on numerous forms of electronic commerce including electronically downloaded software, Internet access, creation of Web home pages, posting of Web home pages, cable television services, credit reporting services, information services K and data processing services.

Similarly, New York imposes its sales tax on numerous forms of entertainment or information services provided by telecommunications, such as stock quotes, credit reports, computer bulletin board systems, tax or stock market advisory and analysis reports, legal information and sports highlight lines. To be sure, these jurisdictions with expansive sales tax based did not set out consciously to tax the Internet – for the obvious reason that the Internet was virtually unknown to the general population until the early 1990s.

To date, no single state has comprehensively addressed the many sales tax and nexus issues related to electronic commerce. Rather, these states impose sales taxes on certain categories of electronic commerce as the result of a hodgepodge of existing laws frequently intended to tax other types of activities such as sales of telecommunications, canned software, cable television, information services, computer services and data processing. In many cases, states are attempting to use a mid-twentieth century tax system – designed largely for manufacturers and vendors of tangible personal property – to tax a technologically advanced 21st century service industry.

The Internet is exploding with new concepts and terminology such as TCP/IP digital assistants, packet switching, web crawlers, routers, hyperlinks and encryption.- Not surprisingly, these old tax rules are often ill suited to taxing electronic commerce.

Complex State Tax Issues Related to the Internet: Due to complex . intangible and interstate nature of electronic commerce, the rapid growth of the Internet and the information highway raises more issues for state income and transactional taxation than for federal taxation. Present and future state taxation of electronic commerce touches upon some of the most controversial and cutting edge issues in state taxation including:

Should services be subject to sales and use taxes as extensively as tangible personal property? If so, what rules should be applied to the complex fact patterns of many services – particularly electronic services?

Should sourcing rules for corporate income tax purposes be revised withr egard to the sourcing of the sales of services or intangibles?

Even if an activity is subject to a sales or- income tax, there is no filing requirement unless nexus is established. Accordingly, should nexus rules be extended so as to apply to remote sellers with minimal physical presence, economic presence, intangible property presence, or attributional presence (i.e., activities or presence of third parties attributed to the taxpayer)?

The Future State Taxation Of Electronic Commerce :

1. General Issues. The state taxation of electronic commerce is in its infancy and there are many unresolved issues and statutory and regulatory ambiguities. There are already stark differences in approaches taken by various states that are creating considerable confusion and a lack of uniformity in state tax rules. In many cases, states are attempting to adapt a mid-twentieth century tax regime – developed for manufacturers and vendors of tangible personal property – to a technologically advanced 2151 century service industry. In response to both the phenomenal growth of the Internet and the general inadequacies of state tax rules regulating this type of economic activity, many states are in the process of evaluating their approach to the taxation of electronic commerce.

The effectiveness of state tax rules in adapting to electronic commerce will likely have a major impact on public opinion toward state tax policy in the early twenty-first century, ironically, in drafting tax policies, the states are caught between two conflicting forces – one prodding them toward avoiding or delaying the taxation of electronic commerce; the other compelling them to continue or expand the taxation of cyberspace.

2. Cautionary Pressures. First, there is pressure on states to proceed cautiously so that they do not adversely impact the entrepreneurial businesses that are commercializing the Internet and other forms of electronic commerce.

Given the low entry barriers to interstate commerce by means of the Internet, these new businesses may be disproportionately small or medium- size companies that are ill-equipped to handle the compliance burdens of multi jurisdictional corporate and sales and use tax filing responsibilities. The inclination to proceed deliberately with new tax rules on the Internet is also reflective of the sheer novelty and dynamism of electronic commerce.

There are few computer experts, let alone revenue department officials who can accurately predict how quickly or in what form electronic commerce giving serious consideration to the range of different access and content providers and the likely impact of technological developments. The go-slow approach toward extending sales tax laws to newly emerging electronic services is reinforced by the anti-tax undercurrent in the American electorate.

Those state that do not currently impose sales taxes on electronic commerce confront the reality that it is always more difficult to enact a new tax than it is to maintain the status quo that includes a broader sales tax base. This is particularly true of states that traditionally have not had broad – based sales and use taxes on services.

Retrenchment: There are a number of state that have recently reversed or delayed implementation of taxes on electronic commerce. For example, in 1993, Tennessee enacted legislation that exempted telephone-abased information services from Tennessee’s telecommunication sales tax. The law removed the term “value added network” from the section of the Tennessee Telecommunications Tax Act that defines the kinds of services to which the tax applies.

In the absence of such legislative action, the Tennessee tax rules could have been interpreted to tax electronic information services. Similarly, Florida has postponed implementation of new rules that would have extended the sales tax to certain types of electronic commerce. The Florida Department of Revenue had decided in 1995 that electronic commerce would be taxed as telecommunications services.

The Department took this position on the basis of a pre-existing statutory definition of “Telecommunication services” that included “teletypewriter or computer exchange service.” However, Governor Lawton Chiles issued an executive order postponing the implementation of the new tax rules while a Telecommunications Taxation Task Force studies the ramifications of taxing the Internet. (Note 191) Similar Internet tax study commissions have been established in a number of sates including Massachusetts, New York and Utah. Some of these Internet taxation skirmishes are also occurring on the local level. Recently, in city of Tacoma, Washington announced that it would begin to tax Internet access providers under its telecommunications gross receipts tax.

However, after negative public reaction, the Tacoma City Council voted 8 to 1 to repeal the application of this tax to internet access providers. There has also been considerable controversy surrounding the issuance of MTC Bulletin 95 – 1 on attributional nexus. The Committed on State Taxation (COST) issued a sharp critique of the MTC bulletin – – arguing that the position asserted by the MTC and numerous states was not supported by constitutional case law. In 1996, both the California Board of Equalization (sales tax) and the California Franchise Tax Board (income tax) voted unanimously to rescind their adoption of MTC Bulletin 95 – 1. They did so in reaction to political criticism of the attributional nexus position taken by the MTC.

In many ways, these state tax actions parallel the controversy in the late 1980s and early 1990s over the extension of the sales tax to various non-electronic service categories. In that instance – both Florida and Massachusetts eventually repealed newly enacted legislation that extended the sales tax to a broad range of services. At the same time, numerous other states with longstanding sales taxation of numerous service categories left such statues intact with relatively little political unrest.

3. Expansive Influence: Conversely, despite concerns over the impact and complexity of the taxation of emerging Internet technologies, there are countervailing pressures on states to clarify or extend sales tax rules to encompass electronic commerce.

Attractive Revenue Stream: First, the anticipated revenue growth from the explosion of electronic commerce will appear very attractive to revenue – starved state governments.

For instance, a 6 percent sales tax on $100 billion of electronic commerce sales would result in$6 billion of state tax revenues – or about 5 percent of the total combined sales tax base of ali states that currently impose sales and use taxes. This amount could increase significantly if electronic commerce lives up to its much-heralded potential.

This revenue stream may become increasingly desirable to state governments if the federal government succeeds in pushing down responsibilities traditionally undertaken by the federal government to the state level. For instance, the recent federal welfare reform legislation transferred federal welfare responsibilities to the states with a significant cut in federal monies available for such purposes. Other federal welfare responsibilities such as Medicaid and other health care programs may eventually be turned over to the states – without providing commensurate revenue sources.

Erosion of the Sales Tax Base: Second, if states do not broaden their sales tax statutes to encompass electronic services, states risk an erosion of their sales tax bases as taxable tangible property transactions are supplanted by largely non-taxable intangible property and service transactions. This possibility is particularly troubling to states because state sales taxes yield more revenue for state governments than any other tax – \$125 billion in 1994. in 23 of 45 states imposing a sales tax, the sales tax produces more revenue than the state individual income tax. For example, as discussed above, most states tax the rental of video cassettes or the sale of magazines, but exempt the electronic transmission of motion pictures or periodicals.

Similarly, all 45 states imposing a sales/use tax, tax the sale of canned software or tangible medium but only about one-half of these states will tax the electronic transmission of such software. This is also true in the case of the sale of medical and legal research that is taxed as the sale of tangible personal property when distributed in printed form, but is frequently exempt if transmitted electronically. If electronic commerce succeeds in significantly increasing the share of products delivered directly to consumers intangible or electronic form, then states may take defensive measures just to maintain a stable sales tax revenue base.

This approach is reinforced by a philosophy among many state tax revenue base. This approach is reinforced by a philosophy among many state tax officials that goods and services should be subject to tax – regardless of the method of delivery. According to L.H. Fuchs executive director of the Florida Department of Revenue, the approach to taxation should be “based on the service and not on the method. If you’re talking to somebody state to state, it shouldn’t make any difference if you’re talking on a cable TV system with a modem, a two-write telephone, or Dick Tracy’s wrist radio. A conversion is still taking place.

Remote sellers: Third, there is pressure on the states to aggressively tax remote sellers (with instate customers) so also create a more level playing field with in-state vendors. Many state tax departments are still cafing at the restriction placed on their jurisdiction to tax mail order vendors by the U.S. Supreme Court decision in Quill Corp. As discussed above, states are trying to circumvent the limitations placed on them by the Quill Corp. decision by more aggressively pursuing minimal physical presence, attributional presence, intangible property presence and other nexus theories. Moreover, electronic commerce holds the potential to drastically increase the penetration of markets by out-of-state vendors with little or no physical presence in market states.

Locally based merchants may be at a significant competitive disadvantage if their sales are subject to both income and sales tax while their out-of-state competitors are not. While states may be sympathetic to business concerns about the complexity of tax rules as applied to electronic commerce, they may view these issues as no different – except perhaps in degree – than similar concerns that arise in conjunction with state taxation of interstate business.

In other tax areas, state governments have dealt with complexity by issuing detailed regulations and addressing unique situations on a case by case method.

4. The Prospects for Uniformity: Since electronic commerce holds the potential for significant uncertainty, inconsistency and complexity in compliance with tax rules in various states, it is likely that efforts will be made to create more uniformity among state tax rules.

While states are free to adopt their own tax rules (within federal and state constitutional parameters), there are numerous examples in both corporate and sales tax law of states modeling their status after other jurisdictions or in conformity with model uniform regulations promulgated by the Multistate Tax Commission (MTC).

Recognition of Ambiguous and Incosistent State Tax Rules. In some ways, electronic commerce would appear to be a prime candidate for state tax uniformity efforts. There is wide recognition among both states and business that the state tax rules on electronic commerce are outdated, inconsistent and potentially detrimenta, to the industry. According to a recent nationwide survey of financial and tax executives, 70 percent believe that state and local tax rules governing electronic commerce are ambiguous.

In addition 50 percent of the respondents believe that this lack of clarity is inhibiting their utilization of the Internet. Moreover, the Internet is a revolutionary new technology where govemment/business dialogue might be most conducive to developing state tax rules that reflect the complexities of technological developments and industry practices.

As was evident with the financial services industry, a broader understanding of the different business segments (transmission and content providers) and the underlying technological architecture of the Web (servers, protocol conversion) can be of great assistance to state tax administrators in developing more workable and less burdensome state tax rules.

Obstacles to Uniformity: Nonetheless, there are significant obstacles to business and government participation in state tax uniformity efforts involving electronic commerce. First, with regard to nexus rules, there is wide disagreement among the states and businesses over what are the constitutional boundaries of a state’s taxing jurisdiction. This issue is likely to be settled in many states, not at the bargaining table, but in case by case adjudication by the state and federal courts.

Second, with regard to the creation of more uniform and workable state sales and use tax rules on electronic commerce, businesses have much to gain by participating in ongoing state tax commissions studying the taxation of the Internet. Internet-related businesses frequently have technical expertise and practical experience that is invaluable to legislators or tax administrators who are considering how to revamp their existing sales tax rules as they apply to these emerging technologies.

However, cooperative efforts on sales and use tax clarification are likely to be hampered by the very different approaches taken by states on the taxation of electronic commerce. Some states impose broad-based sales taxes on Internet-related transmission and content, while other states do not tax any Internet-related activities. Still other states fall somewhere in the middle of the spectrum. As long as many states exempt most or all Internet content- related activity from the sales tax, it may be difficult for business to engage in uniformity efforts for fear that some of these states will adopt the more uniform rules and extend their sales tax bases.

In the shortterm, businesses are likely to oppose taxation of many Internet- related services where that is politically feasible and to engage in uniformity or clarification efforts only where the imposition of the tax is inevitable or irreversible. With regard to efforts to revise corporate income sourcing rules for Internet-related service activities, there is likely to be much more willingness on the part of business to participate in joint government/business dialogue.

As is evident from other MTG special industry apportionment regulation projects, these efforts typically lead to a change from the traditional “costs of performance” sourcing rule for service income to the “designation” or “market state consumer” rule utilized with the sales of tangible property. As discussed above, this change would generally be beneficial to electronic service businesses and is likely to be embraced by entities involved in electronic commerce.

Beneficial Approaches: While no single set of policy prescriptions is likely to gain universal support, there are a few general approaches to state tax uniformity that might prove beneficial for both at administrators and taxpayers.

First, with regard to nexus, regardless of how aggressive an individual state choose to be, it would be useful for the taxing jurisdiction to clarify its positions on “slight” physical presence, attributional nexus and intangible property and economic nexus (particularly in connection with electronic commerce fact patterns) so that taxpayers know what rules they are expected to follow (or challenge).

With regard to sales and use tax rules on electronic commerce, regardless of how broad an individual state chooses to make its sales tax base, it would be helpful for the state to clearly spell out the different types or services that it considers taxable under its statutes.

In so doing, explicit distinctions between transmission-based services and content – based services might avoid endless wrangling over definitional ‘ issues. A state should also delineate the circumstances under which it would apply the use tax to interstate electronic services. If a jurisdiction chooses to have broad-based sales taxes on electronic services – it would be useful to ^ adopt rules on exemptions and other substantive and procedural issues that are consistent with rules utilized in conjunction with sales of tangible personal property.

For instance, where non-taxable and taxable services are bundled together, it would be constructive if a state adopted in “in conjunction with sales of tangible personal property. For instance, where non-taxable and taxable services are bundled together, it would be constructive if a state adopted an “inconsequential” rule.

Under such a rule, if the taxable component of a transaction makes up less that 100 percent of the total sales value and that component is not separately stated in the sale, then the vendor would be treated as the “consumer” of the taxable portion (subject to a sale or use tax) not the vendor of a bundled taxable and non-taxable service. In connection with both sales and income tax rules, it would be advisable to develop sourcing rule that focus on where a consumer is utilizing the electronic services – not where a vendor or its computer servers are located.

A “market” state” approach would avoid creating locational disincentives for domestic-based corporations and also be more consistent with the treatment of sales of tangible personal property. The extent that a state develops a new r position on the application of its sales and use tax laws to certain Internet activities, it would be desirable for the state to impose its position on a prospective basis, not a retroactive basis.

This approach would allow effecting businesses an opportunity to comply ‘ with new rules, without subjecting them to substantial back liabilities based on ambiguous statutory or regulatory interpretations. In conclusion, while many businesses would prefer that taxes not be imposed on certain electronic services.

The next best alternative is for the imposition of taxing authority to be clear and consistent. If the categories of taxable services and the principles of “nexus” are coherently set forth, then taxpayers can comply with the rules and take them into account for purposes of business decisions. This is particularly important with “trustee” taxes such as sales and use taxes where the real imposition of the tax is typically on the consumers – and the vendor is simply acting as a collection agent for the government.

In connection with sales and use taxes, if it is determined on audit examination that a tax is due, then the vendor may not be able to recover the taxes owed from the consumers and will have to assume the tax burden itself. Given the novelty and complexity of electronic commerce, state tax rules on electronic services will never be “simple” or entirely free from ambiguity.

However, if states and businesses work together, the end product is likely to be much more comprehensible and equitable.

DU SOL B.Com 3rd Year E-Commerce Notes