ELECTRONIC COMMERCE UPDATE

July/August€1996

Electronic Commerce Tax Review Suggested

Nine out of ten financial executives at American companies currently engaged in buying and selling goods or services over the Internet strongly suggest that government should 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 on behalf of KPMG Peat Marwick LLP (New York, N.Y.).

In this survey, electronic commerce is 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. Respondents span four industry groups: publishing; software/business services/advertising; communications; and manufacturing/distributing/retail.

Almost seven out of ten respondents (67%) said that state and local tax laws governing electronic commerce are ambiguous, while more than half of those polled (51%) said that this ambiguity is already inhibiting their involvement in electronic commerce. Furthermore, 50% of respondents said they are "not very" or "not at all" familiar with the sales and transaction 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.

"The huge growth potential of the Internet has undoubtedly caught the attention of state tax administrators who are eagerly looking for ways to apply existing tax laws and capture some of the revenue this business generates," said Michael H. Lippman, National Partner-in-Charge of KPMG's State and Local Tax Technical Services. "On the other hand, companies are saying that tax law, in its present form, cannot be applied to the new world of electronic commerce. They are calling for, at the least, a rewrite of the statutes; many contend that the states should give electronic commerce time to develop before imposing taxes."

Looking at taxation of electronic commerce from an international perspective, Jeff Stein, National Partner-in-Charge of KPMG's International Services, notes that the impact of ambiguous tax laws on electronic commerce is even more heightened as companies expand their sales and operations overseas.

"Electronic commerce has the potential to fuel the engine for future growth of U.S. exports," notes Stein. "In fact, 83% of study participants believe that electronic commerce will be a major vehicle for U.S. exports."

About one-third of respondents believe that state and local taxes imposed on electronic commerce 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 will be just as aggressive as individual states in imposing taxes on electronic commerce.

The full study is available through KPMG's 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) 872-6570.

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