Hastings Business Law Journal


The international tax authorities are struggling to create an effective scheme to generate revenue from electronic commerce (“e-commerce”). Currently, the United Stateshas no clear policy on the taxation of these transactions, which deters international companies from locating their servers within the United States based on the fear of high tax rates and uncertain results. The United States should adopt a domestic and international policy that focuses on a consumption-based approach to taxing e-commerce. However, the Organization for Economic Co-operation and Development (“OECD”) and several member countries recommend using source-based concept of permanent establishment to tax the transactions based on the location of the server. By focusing on the location of the server, permanent establishment allows companies to manipulate the patchwork international tax scheme and locate servers in tax havens. This Note proposes that the United States take the lead in shifting the international consensus towards a consumption-based approach of permanent establishment that sets a minimum floor of gross income and transactions within a jurisdiction. This solution would not only eliminate the uncertainty of the United States’ position on taxation of e-commerce, but also would generate increases in tax revenue and frustrate opportunities to manipulate the system.