The advent of technology and the Internet has changed the way we live our daily lives and conduct business transactions. Many of us can’t imagine not conducting business activity without the benefit of computers, smartphones and the Internet. All of the advances have impacted not only business, but also how the results of the business activity are taxed.
This month, Congress is again considering whether to allow states to tax certain Internet-related transactions. Many argue that electronic retail transactions have an advantage over brick-and-mortar retailers in that the electronic retailers in many cases are not obligated to charge state sales taxes on transactions. The states point out the fact that the state treasuries are losing out on billions of dollars of tax revenues. This potential revenue may be significant to many state coffers.
The Internet also has changed how news is reported and accessed by readers. It has changed how information is gathered with respect to reporting events and investigating newsworthy items of interest. Information gathering for news is making use of the same tools we use in gathering information for business or recreational use.
The use of the Internet to obtain information for reporting is illustrated by recent news reports in Europe that indicated major multinational companies face inquiries from governmental tax authorities regarding certain tax strategies. These strategies are reportedly reduced corporate income taxes in high tax jurisdictions and to subject the income to tax in lower tax jurisdictions. Such tax planning has been undertaken in recent years with some exotic or interesting names such as “Dutch Sandwich” and “Double Irish” to describe the planning. Just search these terms on the Internet and you will get an incredible number of hits discussing these structures, which some U.S. technology and pharmaceutical companies are reportedly using and reducing their tax burden in certain jurisdictions.
In the past few weeks, Reuters performed an investigation after a major multi-national company made certain statements regarding its tax strategies. The subject company indicated certain business activities were being undertaken in Ireland. Reuters decided to review the company website, recent job postings and LinkedIn profiles of more than 100 London-based employees of the company. This detective work by Reuters indicated that certain facts (in the opinion of Reuters) may not be as they were represented by the affected company.
If the facts were similar or consistent with what Reuters had identified, it would indicate that perhaps there was taxable activity in the United Kingdom and other countries. If there was taxable activity, then taxable income may result along with corporate income tax liabilities in addition to any other taxes such as value added taxes, or VAT.
It may take some time to sort out all the facts in this situation. What this situation does point out is there are many caches of information that are accessible and available for news organizations and tax authorities to utilize when determining whether there is, in fact, certain business activity taking place that is or may be subject to tax.
In the U.S., state tax auditors routinely look at company websites as part of their audit procedures to identify whether certain sales, marketing, warranty or other activities are taking place within a particular state or local jurisdiction. The presence of such activities may create sales, use, income and franchise tax issues and tax liabilities for a company undertaking these activities in a given jurisdiction. Understanding what activities and actions will or will not create a taxable presence in any given jurisdiction is important in determining how and where to conduct business.
The facts and circumstances surrounding the specific business activities of a company are important in the analysis for state, federal and foreign tax purposes. As tax authorities seek additional tax revenues as a result of their own fiscal situations, there is increased attention of how and where businesses are conducting their affairs. The growth in electronic commerce has resulted in tax laws not necessarily keeping up with the changes in technology.
Online and electronic transactions often blur the line where transactions occur and where the transactions are taxed. Is it where the server is located? Is it where the customer is located? Is an online transaction the sale of a product or the providing of a service or some other type of a transaction?
The determination of the answers to those questions depends on all the facts and circumstances surrounding the transaction. The facts may include the terms and conditions of a transaction, where the transaction takes place, and the activities of employees or agents or representatives of the business engaging in the transaction.
In an era of Internet, websites and social media, more information than ever is available regarding the flow of transactions and activity. Customers, vendors and others can now access electronic information regarding the company, its employees and its transactions. It is important that a business consider what information is accessible and available and how others, including tax authorities at the federal, state and foreign level, will interpret the information in applying particular tax laws with respect to whether a particular business transaction is subject to a transaction tax (VAT, sales or use tax) or an income or similar tax.
Businesses should take note of the information presented on their website and the content that can be accessed or downloaded there. In addition, the information included in business or employee profiles on social media including LinkedIn profiles or Twitter or Facebook accounts can be accessed and used by tax authorities in determining what activities or transactions may be subject to particular taxes.
Businesses should consider these and other sources of information that may be accessible by the public in this electronic age. The information may be beneficial or detrimental in sustaining a position and the nature of a business activity or transaction. Remember, it’s not just customers and vendors that are accessing the information that is available on the Internet. Competitors, news organizations and the government can access this information also.
Bill Roth is a tax partner with the local office of BDO USA LLP. The views expressed are those of the author and are not necessarily of BDO. The comments are general in nature and not to be considered specific tax or accounting advice and cannot be relied upon for the purposes of avoiding penalties. Readers are advised to consult with their professional advisers before acting on any items discussed.