Monday, October 24, 2016

Cyberlaw Concepts - Death and Taxes in the E-World

Benjamin Franklin is attributed with correlating death and taxes as inevitabilities of life. The virtual world has not empowered an escape from either. Still, the very premise of our democracy derives itself from the war-inducing notion of “no taxation without representation”. Taxation remains the fundamental source of government revenue, revenue designed to facilitate, sustain and protect initiatives deemed essential to a nation. Arising from the dawn of the Internet, e-commerce opened another taxable avenue.
Unless residing in one of a handful of states, most individuals are accustomed to paying a sales tax. Sales tax is an additional cost associated with a purchase, “imposed…as a percentage” (Craig, 2013), beyond the asking price and collected by the seller to be remitted indirectly back to the state/local government as revenue. All business deemed a permanent establishment (PE) within a state with a compulsory sales tax are required to collect such monies. E-commerce challenges the pre-existing concept of sales tax as a requirement of PE.
Although certain items may be exempt from sales tax (i.e. “necessities” and government purchases), online retailers and online auction sellers operating e-businesses outside of a state’s jurisdiction are not required to collect sales taxes unless such entities appease the “substantial nexus” test as predicated by a 1992 Supreme Court ruling established under Quill Corp. v. North Dakota. If an e-business possess a nexus, or physical connection, such entities are inconvenienced with the burden of collection of sales tax. Multiple nexuses across multiple states introduces a matter additionally complicated by the fifty different systems currently operated by the states. State-championed proposals, such as Streamlined Sales Tax Project, or Federal law proposals, such as the Federal Marketplace Fairness Act, are attempts at addressing the fifty-state bureaucratic nightmare. Nonetheless, consumers taking advantage of “tax-free” online shopping are still responsible for paying use tax.
As opposed to sales tax, income tax augments the coffers at both the federal and state level. Income tax is a direct, compulsory contribution to government, levied by government, typically as a percentage of an individual’s or entity’s annual gross financial worth based upon received revenues. At the federal level, that percentage currently ranges between 0% and 39.6% depending on several factors. State percentages vary by state and range from 0% to 13.3%. Here again, unless residing in one of a handful of states, most individuals are accustomed to paying income tax to both the federal government and the state. (Alaska possess the singularity of having neither a sales tax nor state personal income tax.) According to the Internal Revenue Service (IRS), online sales “may be subject to liabilities for income tax, self-employment tax, employment tax, or excise tax” (Internal Revenue Service, 2016). Generally speaking, online retailers and online auction sellers are required to report earnings generated through sales and to pay income tax on such unless such sales can be equated to engaging in a “hobby” as strictly defined by the IRS.
Another complicated realm under the purview of tax law concerns the taxation of winnings resulting from online pursuits such as gambling. Taxation varies based on both activity and location. The matter is convoluted by a determination of legality so much so that avoidance is the order of business with entities launching offshore operations (Craig, 2013). Yet, gambling, virtual or otherwise, does not allege an illegal action under federal law. In fact, the Unlawful Internet Gambling Enforcement Act of 2006 does not levy a clear declaration although it does provide for actions to be taken by banking institutions regarding deposits suspected of being generated through illegals mechanisms. Therefore, from a federal perspective, online winnings are taxable as those winnings simply comprise part of an individual’s total income and any losses stemming from such activities are then deductible. While the simplicity of the previous statement precludes an exploration of professional opposed to enthusiast, the Catch-22 with reporting additional income generated via online gambling or wagering comes from the states. Thus, the matter of determining legality remains at the state level. Some states have bans while some states have specific laws concerning online gambling. Some states purport nothing. Accordingly, “the taxpayer bears the burden of having to properly substantiate that a deduction is allowable” (Rosenberg, 2009). As a side note, online sports betting is illegal. Online fantasy sports operations blur the line and now rage at the heart of legal debate.
As a final consideration, telecommuting has dynamically impacted fundamental business processes. What was once a novelty has proven an ideal alternate methodology that attacks multiple societal dilemmas. Current technological advancements combined with better management practices have engendered greater mobility of employees (Craig, 2013) and that mobility has enabled benefits to individuals, businesses and the environment. Unfortunately, cash-strapped states have found a way to undermine this idyllic arrangement by introducing a telecommuter tax, a.k.a. “convenience tax”. Precedent created by cases such as Zelinsky v. Tax Appeals Tribunal of the State of New York (2003) imbue states with the authority to extort taxable revenue double what the individual normal pays. Effectively, any individual residing in one state but working/earning income in another state may face having to file multiple state tax returns for money values beyond just what is earned in the state of employment. Furthermore, the telecommuter tax has ramifications extending beyond the individual. Judicial end-arounds of the “substantial nexus” test, such as Telebright Corporation, Inc. v. New Jersey Division of Taxation (2012), establish dangerous precedent permitting the “stretching the limits of traditional taxing principles in order to collect…tax revenues.  It means…companies must now be judicious when permitting telecommuting…or face increased state tax liabilities and compliance” (McClellan, 2014)

*Note: Whether engaging in online markets (virtual or real), online gambling, or telecommuting, revenue is revenue and therefore possibly subject to taxation. Cyber-driven initiatives, and the resultant byproducts, have proven to be another advent challenging the quagmire of tax codes. The best source of information regarding taxes and tax liabilities stem from relevant tax law. The counsel of professionals remains paramount to ensuring compliance. As such, this opinion is a cursory overview regarding taxation of some online revenues or initiatives, providing a broad synopsis of potential impact under current U.S. law.

Reference List

Craig, B. (2013). Cyberlaw: The Law of the Internet and Information Technology. Boston: Pearson.
Internal Revenue Service. (2016). Tax Laws and Issues for Online Auction Sellers. Retrieved from IRS.gov: https://www.irs.gov/businesses/small-businesses-self-employed/tax-laws-and-issues-for-online-auction-sellers
McClellan, C. (2014). Tax Consequences of Telecommuting Employees. Retrieved from carr-mcclellan.com: http://www.carr-mcclellan.com/insights/tax-consequences-of-telecommunicating-employees/

Rosenberg, E. (2009). Online Gambling Poses Tax Conundrum. Retrieved from WSJ.com: http://www.wsj.com/articles/SB10001424052748704779704574553763086903756

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