ELECTRONIC COMMERCE AND
THE IMPACT OF AMBIGUOUS
STATE TAX LAWS

An overwhelming 9 out of 10 financial executives at American companies currently engaged in buying and selling goods or services over the Internet caution that government must clarify the associated state and local tax implications if this new method of doing business is to reach its full potential, according to a study conducted by KPMG Peat Marwick LLP.

KPMG executives interpreting the study state the study indicates that electronic commerce is expanding rapidly but that it also reveals the frustrations of corporate America as it tries to cope with the murky environment created by applying old tax laws to new ways of doing business. Taxation of electronic commerce varies from state to state, so determining what's taxable and who is responsible for paying those taxes becomes very complex.

Almost 7 out of 10 respondents (67%) say that state and local tax laws governing electronic commerce are ambiguous, while more than half of those polled (51%) say that this ambiguity is already inhibiting their involvement in electronic commerce. Furthermore, 50% say they are "not very" or "not at all" familiar with the sales and transactions tax implications--twice as many as those who say that they are "very" or "extremely" familiar with the tax issues. In fact, 20% of the financial executives surveyed do not know if their companies are even subject to sales and transactions taxes for the sale of products and services over the Internet.

KPMG executives believe the huge growth potential of the Internet has caught the attention of state tax administrators who are eagerly looking for ways to apply existing laws and capture some of the revenue this business generates. This meets head on with the fact that many companies do not believe the tax laws, in their present form, can be applied to the new world of electronic commerce. They are calling for, at the least, a rewrite of the statutes and many contend that the states should give electronic commerce time to develop before imposing taxes.

Companies' concerns about taxes, however, go beyond those related to the bottom line. More than half of those surveyed (53%) think taxing electronic commerce has the potential to become a significant threat to privacy. Other specific areas of concern include: "the crafting of equitable laws from state to state and across industries" and "fear that state taxing authorities will take a very aggressive approach in determining whether a company is taxable in its state."

The study indicates that even though companies are saying they're concerned about the impact of state and local taxes on electronic commerce, very few have been proactive in working with taxing authorities to help ensure equitable rules. For example, nearly 7 out of 10 companies (68%) say that they are "not very" or "not at all" involved with efforts to affect state and local tax policy, compared to only 1 in 10 companies that are "very" or "extremely involved." Exactly half of respondents (50%), however, claim they do intend to become involved in industry group discussions and debates in the future.

KPMG's executives note that the impact of ambiguous tax laws on electronic commerce becomes even more heightened as companies expand their sales and operations overseas.

Eighty-three percent of study participants believe that electronic commerce will be a major vehicle for U.S. exports. About one-third of companies believe that state and local taxes imposed on electronic commerce would diminish their international competitiveness. Indeed, some companies even said that they would consider moving their Internet activities offshore to escape state and local taxes in the future. But, KPMG cautions, such a move might not provide the anticipated tax haven because jurisdictions around the world are revenue-starved and may be just as aggressive
as individual states in imposing taxes
.on companies engaged in electronic commerce.

The KPMG Study was executed by Clark, Martire & Bartolomeo, Inc. during June 1996. For the purpose of this survey, electronic commerce was defined as buying or selling products or services over the Internet. The survey was conducted among 291 companies with gross revenues in excess of $50 million. They span four industry groups: publishing; software/business services/advertising; communications; and manufacturing/
distribution/retail. Results of the study are available through KPMG's State
and Local Tax Practice World Wide Web site at http://www.us.kpmg.com/salt/
or by calling Patricia Neil, KPMG's
director of State and Local Tax
Marketing & Communications at
(212) 872-5506. *

State and Local Editor:
Marshall L. Fineman, CPA
David Berdon & Co. LLP

Interstate Editor:
Stuart A. Rosenblatt, CPA
Wiss & Company LLP

Contributing Editors:
Henry Goldwasser, CPA
M. R. Weiser & Co. LLP

Leonard DiMeglio, CPA
Coopers & Lybrand L.L.P.

Steven M. Kaplan, CPA
Konigsberg Wolf & Co., PC

John J. Fielding, CPA
Price Waterhouse LLP

Warren Weinstock, CPA
Paneth Haber & Zimmerman LLP