Imagine yourself in the following circumstance: you want to know the legal issues regarding e-commerce and decide to buy a book on amazon.com or any other online store. You login into your account, click on the book and realize there are two options available; the first is the paperback version and another one is digital. If you buy the paperback version, you will have costs with the book itself plus, packing and transportation. In the other hand, buying the digital copy does not give any additional cost with delivery or packing because is transferred immediately and wirelessly. Therefore, the digital version is often cheaper than the previous option. However, this situation may change in some countries in which the tax implementation of digital products is on the way.
Since the end of the twentieth century, online stores and customers benefit from valuable advantages that online commerce offers. Customers in particular appreciate the cheaper prices and easy comparison of products cheaper prices and easy comparison of products whereas online commerce also offers to businesses the flexibility of not having to open physical company set-ups and Operational benefits which include reducing both the time and personnel required to complete business processes, and reducing strain on other resources. Furthermore, this market is a source of huge amounts of revenue, for instance it has been reported that “iTunes delivers record-breaking $1.4 billion in revenue during Q2 2011”! And it is important to say that we are talking about only a portion of this growing market. Under this scenario, some governments are seeing the selling of virtual products as the “golden pot” of potential tax revenues.
Digital products and services are those which can be delivered over the Internet without anything being sent to the buyer on physical media. Pictures, software, e-books, mp3 songs, virtual goods, virtual currency are samples of digital products that everybody can buy online and, in some countries, might be subject to tax law. This situation is already happening in France in which downloading software to use on a computer is considered a purchase. The vendor is fully taxable on the related profit. In U.S, Amazon.com is collecting sales taxes from customers in only five U.S. states. Several states have passed or are considering to pass “Amazon tax” laws designed to compel Amazon to collect local sales and use taxes from customers. The U.S. has no federal sales tax.
In the same way, the governor of Connecticut is willing to burden the online companies engaged in the selling of virtual products by imposing taxes on products like movies, video games, music, and periodicals. Notwithstanding the attempt of some States in U.S to increase the governmental income, it is possible to note other States that have a diametrically opposite position on regard this matter. Seeking to increase the amount of online companies and boost the economy within their territories, Rhode Island, Massachusetts and New York adopted the tax-free policy in regard to the digital products.
In many countries, the rules regarding the characterisation of digital products and services being sold online are not settled. In Brazil, considering the absence of proper legislation concerning e-commerce, the subject is still quite incipient. In view of the fact that digital products or services do not take the form of tangible goods, it is not possible to tax them yet. Moreover, insofar as these brazilian products are transmitted over the Internet, trade barriers do not apply and thus, not subject to levies on imports. In the other hand, relating to cross-border software transactions, new regulation has been settled in U.S tax law. These rules deal specifically with electronically delivered software. Unfortunately, the U.S. rules relate only to software transactions. Cross-border transfers of other digital products await further rule making.
Undoubtedly, tax-free on digital products helps to increase the billionaire online economy by putting the web stores in a privileged position in relation to the offline companies. In addition, many independent artists are using the internet as a new platform to sell their own creative works instead of going to the traditional record companies. Imposing tax on digital downloads based solely on increasing government revenue may decrease the chances of small entrepreneurs from profit and survival in this difficult market. Unfortunately, it seems inevitable that many governments will turn their eyes to the profitability that e-commerce can offer, however, in the long run, many virtual companies might change their headquarters to tax havens in order to keep up in the virtual world business. therefore, hard times may be coming to many web stores!