The 5th Estate’s Internet Business Challenge: US Tax Law Uncertainty Undermines Amazon's & Expedia's Accountability & Social Responsibility - Emerging Issues in Online Retailer and Online Hotel Regulation
Oxford Internet Institute Symposium: A Decade in Internet Time - The Dynamics of the Internet and Society, September 2011
3 Pages Posted: 5 Feb 2012
Date Written: September 26, 2011
The internet’s unintended impact on society can be seen clearly in the application of tax laws in the United States, particularly the state and local taxing jurisdictions. The federal and state governments' failure to amend their tax laws to recognize new internet business models could result in substantial lost revenue which would impact needed social services and investor opportunities during this ongoing recession. State and local tax laws were drafted during a simpler time. Jurisdiction to tax was based upon substantial physical nexus within the state imposing the tax. Restrictions are placed on the states' power to tax by the Commerce Clause of the United States Constitution.
Amazon: A good example is the Amazon.com business model. The internet has enabled large online retailers such as Amazon to avoid collecting state sales tax on a substantial part of their sales. This avoidance of collecting sales taxes has given online retailers a competitive price advantage over brick and mortar retailers. Further, the loss of local revenue comes at a time of great need for social services and the inability of the state and local governments to fund these social needs.
This research paper will examine the unintended impact of the internet for online retailers like Amazon and the application of the Quill case and the appeal of the Amazon.com case in New York State.
Expedia: A separate related research paper examines a sampling of 6,000 state and local taxing jurisdictions in the United States to determine the unintended financial impact on society of the internet used by online hotel brokers like Expedia and online retailers like Amazon.
State and local taxing jurisdictions derive substantial parts of their revenue from tourists. Since tourists rarely vote where they visit, they become a prime source of tax revenue for the states. Thus almost every state and local jurisdiction imposes some combination of sales and hotel occupancy taxes on its visitors. The hotel occupancy tax is quite high, imposed above state and local sales tax, and based upon hotel guest’s room price. For example, if I made a reservation by telephone directly with the hotel for a room at $200 per night and the hotel occupancy tax is 10%, my cost would be $220 per night with $20 paid to the state by the hotel.
The internet has placed an online broker into the reservation system. A good example of this is Expedia’s business model. If in the above example, Expedia charged the customer over the internet $200 per night and collected $20 hotel occupancy tax, what amount of tax does Expedia pay to the state and local government? If you said $20, you might be wrong.
Expedia negotiates with the hotel to pay a lower rate for the room. If in the example, Expedia paid $150 to the hotel for the room, the amount of tax Expedia pays to the state and local government might be $15 not $20. What happened to the extra $5 tax paid by the hotel guest? It goes into the pocket of Expedia not the local government. Confusion now reigns in the United States with respect to the hotel occupancy tax. The loss of local revenue comes at a time of great need for social services and the inability of the state and local governments to fund these social needs.
Separately, uncertain tax liabilities of internet hotel brokers and online retailers can lower investor confidence for people who have already lost their retirement funds in the market. The unpredictability of earnings leads to volatility of stock prices and online business valuations. Monitoring of the ongoing evolution of tax laws provides an opportunity for hedge fund analysts, institutional investors, sophisticated traders and their clients to profit from their investments.
Keywords: internet, e-commerce, Amazon, Expedia, tax law, onlline retailers, June Klein, 5TH Estate, emerging regulations, technology & marketing ventures, internet outcomes, electronic boardroom, regulation and policy, corporate governance, management, board of directors, legal, accounting
Suggested Citation: Suggested Citation