Designing Tax Policy for the Digital Biosphere: How the Internet is Changing Tax Laws

Abstract

In order to promote a better understanding of the relationship between tax laws and Internet transactions, this Article integrates tax policy discussion with cyberlaw theory by developing a theoretical legal model called the "digital biosphere." The digital biosphere is the Internet, an online forum characterized by internal diversity and technological evolution where commercial and non-commercial activities overlap to a certain extent. The role of tax law, it is argued, is to protect "real world" norms (e.g., the desire to maintain neutral tax treatment between traditional commerce and e-commerce) by aligning tax laws with the nature of the network without unduly interfering with emerging cyberspace norms (e.g., transactional anonymity). On the one hand, reform efforts such as the state-sponsored Streamlined Sales Tax Project (SSTP) are properly addressing the challenges presented by Internet commerce by advocating an Internet-based automated sales and use tax collection system, the extension of state and local tax jurisdiction over remote e-commerce vendors, and the unification of different state and local tax bases. On the other hand, other reform efforts such as the new OECD rule to tax computer server/permanent establishment profits for international income tax purposes fails to address these challenges.

Keywords: tax, internet, e-commerce, sales and use taxes, international income taxes, permanent establishment

JEL Classification: K0, K1, K2