The term "E-commerce" refers to electronic transactions conducted over the Internet and includes the sale, offer or delivery of property, goods, services or information which may be delivered by mail or common carrier (in the case of tangible goods), or transmitted electronically (in the case of software, information or digital products).(l) The value of E-commerce transactions in 1999 has been estimated to be in the range of seventy billion dollars and Internet sales have increased exponentially. Many businesses, companies and individuals have websites that, at a minimum, provide information about their business or products and provide e-mail and mail addresses for inquiries for more information or for product or service orders. As with all other business endeavors, it is important I to consider the costs of doing business on the Internet. Although establishing a storefront on the Internet may involve low initial costs, marketing may still be costly in the vast marketplace of E-commerce vendors where reputation and brand name recognition are still important and often require frequent updates of material on the website, the maintenance of a priority position with search engines, and traditional broadcast and print advertising. On the other hand, remote Internet I vendors that are not subject to sales tax are at a competitive advantage vis a vis traditional bricks and mortar establishments that must collect sales tax on transactions with residents of the state(s) in which the bricks and mortar establishment is located.

Tax Considerations

An important consideration in business transactions is the tax consequences. Vendors that sell goods from traditional bricks and mortar establishments must generally collect sales tax from the buyer at the sales tax rate of the state in which the vendor is located. The sales tax rate varies from state to state. Sales tax on the value of the goods sold is the obligation of the vendor, whether or not the vendor actually collects it from the buyer. On October 21, 1998 President Clinton signed into law the Internet Tax Freedom Act ("ITFA ") which provides a three year moratorium on taxes on Internet access fees and on multiple or discriminatory taxes on electronic commerce to facilitate the development of the Internet and E-commerce. The moratorium will expire this year on October 21, 2001. A five-year extension was passed by the house of Representatives on May 10, 2000.

Although sales use taxes that do not discriminate against the Internet are not affected by the moratorium, the moratorium does prohibit multiple taxes. In enacting the IFTA, Congress found that "[c] consumers, businesses, and other users engaged in interstate and foreign commerce through online services and Internet access service could become subject to more than 30,000 separate taxing jurisdictions in the United States alone."2 The possibility of multiple taxes arises from the nature of electronic commerce, specifically that an E- commerce transaction occurs with each party potentially in a different state or country. Accordingly, there is the potential that each state or country might attempt to tax the transaction.

The states' power to require out of state Internet vendors to charge and remit sales tax is severely limited by certain United States Supreme Court decisions requiring a connection, a "nexus", before a tax obligation may be imposed. Thus, the first inquiry with respect to whether a state may impose sales tax is whether there is sufficient "nexus", i.e. whether a state can constitutionally impose tax on a transaction. The nexus issue was addressed in several United States Supreme Court cases. In National Bellas Hess. Inc. v. Illinois Dept. of Revenue3, the Court used a "physical presence" standard and held that there was insufficient nexus with a foreign corporation to support the imposition of tax obligations where the company had no property, representatives or sales solicitors in the taxing state even though it mailed flyers and filled orders for delivery by common carrier from outside the taxing state. The Court later held, in Quill com. v. North Dakota4, that a foreign mail-order company had sufficient minimum contacts to justify the imposition of tax under the Due Process Clause of the United States Constitution but that the company did not have a "substantial nexus", or the requisite physical presence, to justify the imposition of a tax under the Commerce Clause of the United States Constitution where it merely shipped goods into the state by mail or common carrier. A substantial nexus can also be created by employees, agents, or independent contractors operating in a foreign state. Although it has been argued that the "physical presence" standard involving mail order companies is applicable to electronic commerce, there is no bright line rule on what constitutes sufficient physical presence in the electronic commerce environment to support nexus.

Moreover, current precedent suggests that the physical presence test will be applied to each entity on a separate basis, not on the basis of the contacts of its parent, subsidiary or affiliates. Consequently, in order to avail themselves of the price advantage that the absence of a sales tax provides, Barnes & Noble and Gateway Computer, for example incorporated as separate entities the parts of their business that make Internet sales. Neither company charges sales tax on Internet sales except in the few states where the Internet sales entities are located. The majority of large retailers, - however, including Circuit City, Staples and Toys R Us do collect sales tax on Internet sales in states where I their stores are located to avoid the risk of a large sales tax assessment in the event that the Supreme Court decides to attribute the bricks and mortar affiliated entities' physical presence to the Internet sales entities at a later time. Nevertheless, it may be well-advised for traditional bricks and mortar retail businesses selling tangible goods to set up a separate entity for Internet sales.

The second inquiry with respect to the imposition of sales tax is "source", i.e. in which state or country does a transaction over the Internet take place and which sales tax to apply. Under the Uniform Commercial Code, sales of goods occur where possession and/or title transfers and title transfers where the risk of loss transfers. However, there are no bright line rules with respect to the source of Internet transactions.

The third inquiry with respect to the imposition of sales tax is whether a state or foreign country's tax law, as written, covers the transaction. It. is entirely possible that sales tax on certain Internet transactions may be imposed in some states or countries and not in others. For example, although most states impose sales tax on sales of tangible goods, few states impose sales tax on digital goods such as computer software, music, movies, games and other proprietary content that is downloaded electronically. Consequently, it may be advantageous to invoice digital goods separately from any hardcopy or backup delivered by mail or common carrier.

Moreover, two interpretations of the ITFA's definition of Internet access could preclude taxation of digital goods even in the event that states changed their tax laws to include digital goods. If the term "Internet access" is interpreted as the service provided by traditional Internet access providers in enabling their customers to get onto the Internet, such Internet access providers can bundle proprietary content or digital goods with access services and sell the bundles free of sales tax. If Internet access is more broadly interpreted as the provision of access to content over the Internet, companies that deliver digital products over the Internet would have a strong argument that they are not subject to sales tax collection obligations. Proponents of maintaining the tax free status of digital goods point out that it may be difficult to enforce sales tax collection where buyers can conceal their identity by using electronic cash or credit card payment systems that protect the buyers' identity. However, it is in the vendors' interests to know the identity of their customers for direct marketing purposes, as evidenced by the rise of store discount cards, and vendors are likely to obtain identification information.

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