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) .
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