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INTERNET TAXATION

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Introduction

INTERNET TAXATION June 20, 2007 IS535 Managerial Applications of Information Technology Submitted by Haci Fehmi Ozgun Opal Shelton Background to the Problem Turquoise Incorporated is a web-based startup that is a reseller of electronics. The company is a pure click commerce site. It acts as an intermediary between larger electronic companies and reatail consumer. The company uses a drop shipping method of delivery and orders are taken via their website. They also have a presence on Amazon.com Marketplace and Ebay.com The Company has had moderate success and is thinking of investing more capital into the business and acquiring warehousing facilities. The company has proposed California as a probable location for its new warehouse. However, with the proposed changes to Internet taxation the company is hesitant to pump capital into a business that may lose its competitive advantage to Traditional Brick and mortar business that would severely compromise Turquoise's future profitability. The Board of Directors has retained the services of our group to analyze the impact that the proposed Internet taxation law will have on E-Commerce and its potential impact on the future of the business. History of Internet Taxation The Internet taxation issues stems primarily from the fact that the Internet was not designed for E-Business. The Internet was designed in part to provide a communications network that would work even if some of the sites were destroyed by nuclear attack. Initially primarily academics, engineers, scientists, and librarians used the Internet. ...read more.

Middle

Several factors have been cited that show that this will have an adverse impact on E-Businesses. 1. Consumers use E-Commerce because of the absence of a Sales Tax and if the tax is introduced, the consumer will revert to Brick and Mortar stores. . Hal R. Varian1Dean, School of Information Systems and ManagementUniversity of California at Berkeley explains Economists argue that taxing business purchases is not wise since these taxes end up being passed along to consumers in the form of higher prices, which distorts both consumer purchases and business structure. Suppose that firm A sells a product to firm B for $1 plus a 5 percent sales tax. Firm B then sells the same product to a consumer for $2 plus another 5 percent sales tax. If these taxes are fully passed along to the consumer, he or she ends up paying 15 cents tax on a $2 purchase. The increase in the final tax paid by the consumer due to the taxation of business inputs is known as "pyramiding" or "cascading." This pyramiding of taxes will cause consumers to consume less of the good than they would have otherwise and may cause firms to change their behavior simply to reduce their tax burden. For example, firms may choose to vertically integrate solely to avoid taxation on purchases of intermediate products.(Varian, 2000) 2. An Internet retailer, or any direct marketer, would have to file dozens of sales-tax returns monthly and could be audited any time. ...read more.

Conclusion

consumer would only consider the after-tax price and would be indifferent to the source of its increase.(Smart Economist, 2006) The conclusion is that "On the whole the results suggest that while online retailing owes much of its success to tax avoidance motives, there are still certain dimensions in which online and offline retailers may compete" (Smart Economist, 2006) Because of such a challenge, nowadays most of the vertical price comparison sites has a handy option to calculate the "bottomline price" of the item based on the consumer's ZIP code. www.pricegrabber.com is one of the typical examples of this application. With the information gleaned from our analysis, we advise the company to inject the capital into the business. Taxation gives a competitive advantage for highly price sensitive items as well as high price tag. Otherwise shipping cost may neutralize the taxation advantage. It makes more sense to use other advantages that internet can provide. One example of this can be focusing on "niche products". Niche products target a very narrow consumer segment. Because of that it's not feasible for a brick-and-mortar business to offes such products. Since it's very easy to reach a very wide array of consumer segments via internet; such products and services offer a great opportinuity for click-and-mortar businesses. Regarding the drop shipping opportinuities In dropshipping, since we don't actually stock the products, we have limited control over inventory management, product availability, order fulfillment, shipping processes, etc. Therefore success of the business heavily relies on the reliability of the drop shipping company. It's imperative that working with reputable and reliable drop shipping companies are vital for the success of the business. ...read more.

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