E-commerce and tax administration.

• Author: Brand, Phil

EXECUTIVE SUMMARY

* Combined with continuing advances in technology and reduced costs of hardware and connectivity, use of the Internet will continue to mushroom over the next decade.

* In the area of tax administration, the trends reflect a move away from an exclusive emphasis on electronic filing, refund and payment of taxes and information dissemination, to broader uses of e-government.

* As e-commerce continues gaining momentum in the global marketplace, tax administrators will have to expand their capabilities to grapple with the complex tax-related issues posed by the Internet revolution.

In the new millennium, more and more transactions of all types are occurring via the Internet; practitioners and Federal and state governments are just beginning to maximize use of the electronic arena. This article explains the services that these factions will have to offer to stay competitive in this new, technology-driven environment, and related issues.

The use of the Internet and electronic commerce (e-commerce) has exploded within the past five years, and the growth rate is accelerating. Combined with continuing advances in technology and reduced costs of hardware and connectivity, use of the Internet will continue to mushroom over the next decade. As with any major change, this growth creates both challenges and opportunities for the private sector. It also requires tax and other government regulatory and enforcement agencies to grapple with new issues to prevent increased noncompliance. Importantly, the Web and related technologies offer the government the opportunity to fundamentally (and constructively) alter its relationships with its citizens. Many citizens now file their Federal and state tax returns electronically. Citizens pay taxes and receive refunds electronically; they also seek information, assistance and advice in an electronic environment. The possibilities seem limitless as three-way partnerships between citizens/consumers, government and the private sector create new ways to use cyberspace.

The Growth of E-Commerce

The growth in use of the Internet, the backbone of e-commerce, has been phenomenal over the past few years. Congress established a working group in 1998 to study e-commerce and to provide it with information on size, growth and potential. The First Annual Report of the United States Working Group on Electronic Commerce (issued in 1999) stated "that fewer than 10 million people were using the Internet in 1995, and that more than 140 million people worldwide were using the Internet in 1998." The report concluded that more than one billion people worldwide will be using the Internet in the first decade of this century.(1)

The report was referenced in a concurrent resolution introduced in the House of Representatives in September 1999 that urged the President to seek a global consensus to a ban on tariffs and some forms of taxation on e-commerce and the Internet. The resolution also stated that "by the year 2006, more than one-half of the U.S. workforce is expected to be employed in industries that are either major producers or intensive users of information technology products and services. Electronic commerce among businesses is expected to grow to $1.3 trillion dollars from the current level of just under $45 billion."

Importantly, the adoption of the Internet to conduct business activities has not been confined to the private sector. Government agencies and entities (IRS, Social Security Administration, White House, state agencies) have led the way in establishing-Websites for disseminating information, allowing the filing of tax and other information returns, paying taxes and other services.(2) The growth of this activity (perhaps more accurately described as "e-government") has paralleled the growth of e-commerce in the private sector.

Applications for Tax Administrators

While the growth of the Internet and e-commerce is astounding, so are the fundamental changes under way in how and where government is conducted. In the area of tax administration, the trends reflect a move away from an exclusive emphasis on electronic filing, refund and payment of taxes and information dissemination, to broader uses of e-government. Online account problem resolution, access to account...