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E-commerce creates some challenges to tax systems that were designed with a traditional retail model. There are several key reasons why e-commerce raises tax issues.

The first one is location. Existing tax systems tend to determine tax consequences based on where the taxpayer is physically located. The e-commerce model enables businesses to operate with very few physical locations. An online vendor can easily sell to customers throughout the world from a single physical location.

The second reason is Nature of Products.  E-commerce allows for some types of products, such as newspapers and music CDs, to be delivered in digitized (intangible) form, rather than in tangible form. Digitized products raise issues at the state level as to whether sales tax applies and in which state income is generated for state income tax purposes.

Thirdly, the Internet has allowed for New Marketing Techniques of selling and buying goods and services. For example, individuals can offer their unwanted items to a worldwide group of potential buyers via auction sites, such as E-Bay. When buyers interact directly with a foreign manufacturer, rather than a domestic retailer, the excise tax may go uncollected.

Fourthly, Some of the New Assets created by commercial use of the Internet are domain names (URLs) and web sites. For income tax purposes, issues exist as to how to treat the costs of creating or acquiring such assets, as well as the characterization of any gain or loss generated upon disposition of the asset. Sellers of such assets may face uncertainty in the law as to how to characterize the gain or loss generated from the disposition (capital or ordinary).

Fifthly, The Remote Workforce of an Internet company may be scattered throughout a state or country, rather than working in a single work location together. This can raise issues as to whether the presence of the employee in a particular state creates tax obligations for the employer in that state.

At last, because of the Nature of Transactions, the Internet allows for paperless transactions and the potential for the use of electronic cash. This raises administrative concerns for the Internal Revenue Service as to whether transactions were properly reported, whether an audit trail exists, and whether new reporting rules are needed. [10]

 

For the past several years, for not taxing the Internet, even though online sales still account for only about 1 percent of all retail purchases in the United States, a recent University of Tennessee study argued that states lost US$13 billion in tax revenue to online sales in 2000. [11] Vendors selling goods and services online should be treated similarly to “Main Street” vendors selling the same goods and services.  With many state governments facing record budget deficits, pressure to levy sales tax online is likely to increase. [12]

 

In order to tax e-commerce correctly, several strategies can be adopted as follows:[13]

1.   The tax rules should clearly specify when the tax is to be paid, how it is to be paid, and how the amount to be paid is to be determined. Lack of certainty in the tax system reduces the confidence taxpayers.

2.   A tax should be due at a time that is most convenient for the taxpayer.

3.   The costs to collect a tax should be kept to a minimum for both the government and taxpayers.

4.   The tax law should be simple so that taxpayers can understand the rules and comply with them correctly and in a cost-efficient manner.

5.   The effect of the tax law on a taxpayer’s decisions as to how to carry out a particular transaction or whether to engage in a transaction should be kept to a minimum.

6.   The tax system should not impede or reduce the productive capacity of the economy.

7.   Taxpayers should know that a tax exists and how and when it is imposed upon them and others.

8.   The tax system should enable the government to determine how much tax revenue will likely be collected and when.

 

 

When the Internet was booming, more and more concerns are raised about consumer safety and the possibility of their credit card numbers being stolen during the online purchasing process.  Consumer’s fear of online fraud has long been the bane of e-commerce, which holds back retailers placing an ever-increasing emphasis on web trading.

Before the Internet, credit card fraud was limited by opportunity. Thieves could take only as many numbers as they could find on new cards mailed to home mailboxes, billing statements, or carbon receipts in checkout-counter wastebaskets. Sorting through a cardholder's trash or raiding mail costs lots of labor work. With the growth of online shopping, illegal access to card numbers has happened quickly. If the database that stores thousands of credit card numbers is poorly protected, it can be caught easily.

For all of the engineers with advanced degrees chasing solutions to the online-fraud problem, one of the latest strategies comes straight from a grade-school curriculum: working and playing together.[14] In order to prevent the fraud, lots of companies adopt several methods. For example, with online fraud on the rise, Visa USA has stepped up efforts to ensure the safety of its online transactions. The credit-card company shored up its Visa Secure Commerce, a series of online security measures aimed at protecting cardholders and merchants.[15] Leading e-commerce companies launch Worldwide E-commerce Fraud Prevention Network. These companies include Amazon., American Express, Buy. and Expedia..

American Express conceived the idea for the Fraud Prevention Network in early 2000 and was quickly joined by other industry leaders, all of whom have made security a top priority and are committed to making the World Wide Web a safer place for businesses and consumers. One of the group’s key strategies will be to share fraud prevention information and best practices with merchants of all sizes in order to improve Web security and decrease the costs associated with fraud. Merchants often bear the cost of fraud when stolen cards are used to purchase goods at their site. The Worldwide E-commerce Fraud Prevention Network will conduct a number of activities to promote increased security.

The coalition released five recommended tips for e-commerce fraud prevention: [16]