Internet is not tax-free.

• Author: Smiegowski, Nancy N.

Everyone loves a good deal, including tax practitioners. Ordering goods tax-free over the Internet sounds like an idea that is too good to be true and, unfortunately, it is.

The Internet Tax Freedom Act of 1998 did not forbid the taxing of e-commerce but rather forbade the imposition of new and discriminatory taxes. As a result, existing taxes are still in force, as are all the traditional rules of nexus and mail-order taxation.

When setting up an Internet operation, the following should be investigated and considered as part of a nexus analysis:

* How the revenue stream is being generated;

* Who is doing the work;

* Where the work is being done; and

* How the product or service is being delivered.

Revenue Streams

E-commerce income may or may not follow a company's current revenue stream. If the income is identical to the company's current business, nexus will most likely follow the same jurisdictions in which filings are currently made. However, with the expansiveness of the Web, it is also possible to inadvertently create nexus in new states.

In one situation, a franchising company wanted to sell a service over the Web. The franchiser had nexus only in one state, although the franchisees had nexus in multiple states. In the core business, customers contracted directly with the franchisees for the services. The franchisees attracted business through local advertising and yellow page ads. However, in the Internet business, the franchiser sold the service to the customer, then directed the customer to a franchisee, who the franchiser reimbursed for providing the service. The customer did not have a choice of where to go for the service performed. Because the franchiser controlled the transaction from beginning to end over the Internet, it now had nexus in many more states. The franchiser's solution for preventing additional nexus would have been to use a separate legal entity for the Internet-based company, with appropriate safeguards for creating a true arm's-length relationship to the original core business.

Performance of the Work

In the current business climate, virtually every function a company requires can be outsourced. In particular, e-commerce activities lend themselves to this by way of call centers, customer support centers and fulfillment distribution centers. It Can be disconcerting while doing nexus planning to discover parts depots around the country, inventory docking taking place at a shipper or showrooms in large cities...