© 1999 David L. Forst.

Attorney, Fenwick & West LLP, Palo Alto, CA.

1. Under existing rules, the right of a jurisdiction to tax usually does not arise unless and until a taxpayer has some sort of physical connection with that jurisdiction. Since the consummation of an electronic transaction does not necessarily require a physical connection with the purchaser or its jurisdiction, businesses can reasonably take the position that they should not be subject to tax under taxing regimes that require a physical presence. See David L. Forst, The Continuing Vitality of Source Based Taxation in the Electronic Age, 15 TAX NOTES INT'L 1455, 1467-71 (1997).

2. See The Organization for Economic Cooperation and Development Model Tax Convention on Income and Capital, art. 7(1) (1992), 1 Tax Treaties (CCH) 191 [hereinafter OECD Model Tax Convention].

3. See also id.

4. Department of the Treasury, Office of Tax Policy, Selected Tax Policy Implication of Global Electronic Commerce (visited Nov. 1, 1997) <http://www.fedworld.gov/pub/tel/internet.txt>.

5. Id. at 19.

6. See Organization for Economic Cooperation and Development, Electronic Commerce: Taxation Framework Conditions (visited Jan. 8, 1999) <http://www.oecd.org/daf/fa/e_com/framewke.pdf> [hereinafter OECD Ministerial Report].

7. See Forst, supra note 1

8. See supra, note 2 and accompanying text.

9. See U.S. Could Gain Income if Current Policies Apply to Electronic Commerce, Attorneys Say, TRANSFER PRICING REP., July 16, 1997, at 178.

10. See OECD Ministerial Report, supra note 6.

11. Id. at 4.

12. The permanent establishment concept generally provides that a country cannot tax a non-resident unless the non-resident has a permanent presence in the country, e.g., through an office, factory, workshop or the like. The permanent establishment concept was developed before the era of electronic commerce, and thus, as presently conceived, does not take into account whether a country can tax a non-resident if the non-resident's sole contact with the country is an electronic one. See Forst, supra note 1, at 1467-71.

13. See Organization for Economic Cooperation and Development, Electronic Commerce: A Discussion Paper on Taxation Issues (visited Jan. 8, 1999) <http://www.oecd.org/daf/fa/e_com/discusse.pdf> [hereinafter OECD Discussion Paper](visited January 1999).

14. See T.D. 8785, 63 F.R. 52971-52983 (1998).

15. OECD Ministerial Report, supra note 6, at 4.

16. Online escrow agents are good examples of reintermediators. An online escrow agent facilitates online sales by holding the buyer's cash until the buyer receives and is satisfied with the goods that it has purchased. (cite)See Jamie Beckett, Rise of the Online Middleman; Escrow Services in Demand as Net Auction Sites Proliferate, S.F. CHRON., Jan. 14, 1999, at B1.

17. See OECD Discussion Paper, supra note 13, at 25.

18. See, e.g., OECD Model Tax Convention, supra note 2 (providing that the profits of an enterprise of a contracting state shall be taxable only in that state unless the enterprise carries on business in the other contracting state through a permanent establishment situated therein.).

19. Peter Menyasz, OECD Joint Declaration Stresses Use of Consumption Point as Locus for Taxation, DAILY TAX REP., 196 DTR G-2 (Oct. 9, 1998).

20. See U.S. GOVERNMENT WORKING GROUP ON ELECTRONIC COMMERCE, FIRST ANNUAL REPORT (Nov. 30, 1998), reprinted in BNA DAILY TAX REP., Dec. 1, 1998, available at <http://www.doc.gov/ecommerce/E-comm.pdf>.

21. Pub. L. No. 105-277, 112 Stat. 2681 (1998).

22. See Quill Corp. v. North Dakota, 504 U.S. 298 (1992). In Quill, the taxpayer sold goods to customers in North Dakota through a mail order catalogue. The taxpayer did not have any employees in North Dakota, or otherwise have a physical presence in North Dakota. At issue was the whether the corporation was required to collect North Dakota use tax on sales made to residents of North Dakota. The Supreme Court held that a corporation must have some physical presence in the state for the state to be able to impose the obligation to collect use taxes.

23. CAL. REV. & TAX. 65001 (West 1998).

24. See Kathleen Wright, States of Mind: Logging onto the New Tax World: California Passes its Tax Freedom Act, 98 STATE TAX NOTES 197-3 (1998).

25. See, e.g., CAL. CODE REGS. tit. 18, 1684 (West 1999), which provides that the use of a server on the Internet to create or maintain a Web page or site by an out-of-state retailer is not considered as a factor in determining whether the retailer has substantial nexus with California.

26. See Jeremy Holmes, Council Issues Report on E-Commerce, Urging Simpler Rules, Out-of-State Collection, 240 DAILY TAX REP. H-1 (1998).