Issues raised by the U.S. Treasury included:

• the expected use of electronic money
• the difficulty of identifying parties to transactions
• the difficulty of auditing e-commerce transactions

Electronic money, especially "unaccounted" money, seems to be the U.S. Treasury's biggest concern. Unaccounted money is digital cash that can be spent without any record of its use. The potential for tax avoidance is enormous where cash can move around the world on "smart" cards, similar to prepaid telephone cards.

Currently, the underground cash economy is large, and is a source of worldwide tax evasion, but is limited by the difficulty of carrying large amounts of cash. Digital cash, on the other hand, can be carried on smart cards in very large amounts, and has the potential for vastly increasing the size of the underground economy.

The Internet makes it possible to sell goods and services without either the buyer or seller being identified. However, to properly tax transactions, some minimal information is needed. For instance, an Illinois vendor's sale to a California customer may be taxed in a different way than a sale to an Illinois customer. To properly tax a transaction, the location of the buyer must be known.

However, in e-commerce, many vendors need only credit card numbers to complete transactions. For instance, where software is downloaded from a Web site, the vendor does not need to know the identity or location of the buyer to complete the transaction. Where information is not needed to complete a transaction, the vendor may not request that information, even if the information is necessary for proper tax compliance.

To enforce tax compliance in the future, the government may require the use of digital signatures, which will provide information regarding the identities and locations of buyers. Digital signatures are being discussed by tax authorities, but widespread use will not take place for several years.

The IRS has a difficult time auditing a company that deals extensively in electronic cash, and has unidentified customers. The IRS can be expected to propose rules to deal with these problems. However, a Web-based business is mobile. A company that finds itself in a country that aggressively enforces tax compliance can simply move its Web server to a friendlier jurisdiction. For instance, a company can easily move its Web site to a Caribbean island country that does not share tax information with the IRS, and which enforces bank secrecy laws.

Privacy and Taxation
Consumer surveys consistently rate privacy as a major concern in e-commerce. BusinessWeek recently reported that 52 percent of those who use the Internet, but do not buy online, are concerned about misuse of their personal information.

Generally, governments of the major powers attempt to protect consumer privacy, using a combination of mandatory and voluntary rules aimed at insuring the quality of information gathered on consumers, and at restricting the access to that information. In addition, the technology of e-commerce, such as encryption and electronic cash, allows vendors to protect the privacy of their customers. The desire for privacy conflicts directly with tax compliance. The IRS wants more, not less information about Internet-based transactions, and can be expected to push for legislation allowing it to gain access to this information.

A worry of e-commerce vendors is the ability of the IRS to legally "hack" into computer systems to gain access to sensitive data. U.S. laws, such as the Electronic Communications Privacy Act, prevent unauthorized private access to email and other online information, but give the government legal access. Major questions exist surrounding e-commerce vendors' rights to protect information from the prying eyes of the government.

Digital Products
Digital products, such as electronically delivered software and books, are unique to e-commerce. While transaction volume is small now, as bandwidth increases, and recorded music and videos can be delivered electronically, volumes will soar.

Unfortunately, there is no consistent set of rules to describe digital products for tax purposes. This is a serious problem for interstate and international taxation, where the taxability of a sale may depend on the nature of the products being sold.

Interstate Product Sales in the U.S.
U.S. companies engaged in e-commerce are all involved in sales outside their home states. Usually, companies are taxable outside their home states only if they have "nexus" in other states where sales are made. "Nexus" means a company has sufficient "presence" in another state to be subject to that state's income tax, or sales tax.

For sales tax, the questions are, is the vendor subject to tax in the state (does it have nexus), and are the sales subject to sales tax? A company is usually taxable in another state only if it has some physical presence in that state, such as an office, salespeople, or a store. The difficulty in e-commerce is that there are few rules for determining the nexus of companies where presence in a state involves a Web site accessible in a state, a Web server in a state, or a hosting service in a state.

Where digital products are sold, the difficulty in applying the sales tax rules is in defining the digital products as either tangible or intangible. In most states, tangible personal property is taxable, but intangible property is not.

For instance, most states tax software delivered in a box as tangible personal property, however, the taxability of the same software, electronically delivered, is unclear. Only 15 states in the U.S. have specific rules for the taxation of electronically delivered software. Of those fifteen states, eight subject such software to sales tax, and seven do not. A vendor that tries to guess whether downloaded software is taxable in the remaining 35 states may have about a 50 percent chance of guessing right.

Interstate income tax rules may be even less certain than sales tax rules. For example, the sales tax rules require a vendor to have physical presence in a state before it is taxable. Income tax rules are less certain, especially when the sales involve electronically delivered products.

The Internet Tax Freedom Act, signed into law in October, 1998, addresses only a few issues of interstate commerce. The necessary changes in state tax rules are still years away. In the meantime e-vendors will have to deal with considerable uncertainty and risk.

International Taxation of E-Commerce
Companies engaged in e-commerce can sell to customers in Australia as easily as to customers down the block. The ease of "cross-border" transactions raises tax questions that many companies are ill-equipped to handle.

The first question every company asks is, what is the difference between the taxation of an Internet-based transaction and a conventional transaction. Where the sale results in the physical delivery of goods, there is no difference. Goods must still go through customs, are subject to import duties, and may be subject to income tax in a foreign country, based on rules that have been around for decades.

The big difference in e-commerce is the electronic delivery of goods and services, especially software. Rules governing the electronic delivery of products are virtually nonexistent. Governments around the world are in the early stages of policy making, and, while there is some consistency in the policy proposals, there are significant differences.

U.S. companies selling overseas are mainly concerned about being taxed overseas. Concepts such as value added tax are strange to U.S. companies, and failure to comply with foreign tax rules can be disastrous. Unfortunately, foreign tax rules for e-commerce are not developed.

Foreign companies selling to U.S. customers are concerned about such things as whether a Web server in the U.S. results in taxability in the U.S. While such things are being discussed at a policy level, firm rules are not in place.

Other difficulties in e-commerce relate to the fundamental nature of international taxation, which depends in large part on the location of buyers and sellers, and the nature of what is being sold. Where the location of a buyer is unknown it is impossible to properly comply with international tax rules. Where the nature of a transaction is unclear, such as a transaction involving digital goods, it is equally impossible to comply with the rules.