United States: State Income and Franchise Taxes in the Digital Environment

Abstract

Abstract It is difficult—if not impossible—to read the state and local tax press or attend state and local tax programs without being presented with various thoughts and analyses regarding the manner in which a business engaged in one of the various aspects of electronic commerce is being or should be taxed. Although it is safe to assume that the significance of e-commerce to our economy will only continue to increase, and while such significance will certainly cause even more dislocations in state taxing systems than we have already witnessed, numerous state tax issues are clearly “in play” today and require current reactions. It is in this context that this chapter discusses certain fundamental state income, franchise, and business activity tax principles and examines their application to e-commerce in the current legal environment. To analyze the correct application of state and local tax principles to transactions in the digital environment, it is important first to understand what the digital environment is. The best approach is to view the area as being composed of four segments. First, and the most prevalent today, is the ordering of tangible personal property through electronic or digital channels, such as using a home computer to access, over the Internet, a company’s Web site to order a shirt that is delivered by mail or common carrier.