The repercussions of July's
New York Supreme Court decision against World Interactive Gaming Corp. (WIGC) could end up being more serious than originally feared. According to a recent report by KPMG, the ruling could stand as a precedent for the taxing of e-commerce transactions.
On July 26, Supreme Court Justice Charles Edward Ramos ruled that WIGC's offshore betting service was illegal because it accepted bets from agents on computers located in New York. Experts immediately speculated that the ruling could strongly influence the interpretation of jurisdiction as it relates to the World Wide Web. It's also opened the doors for debate over the taxation of Internet transactions.
"This decision has the potential to dramatically impact the taxation of e-commerce by states," said Nilesh Shah, head of the KPMG E.Com Tax Practice. "In essence, the court held that the State of New York has jurisdiction in this matter because it deemed the virtual casino to reside within the user's computer terminal, and thus within the state itself. The same logic could be extended to the taxation of Internet commerce--that e-sellers reside in the states where users purchase their goods--and thus would make out-of-state sellers subject to state tax laws.
"This could send chills up the spine of e-sellers. It will be interesting to see how this ruling plays out over the next couple of months in various states. You also have several foreign governments looking at this ruling who could think of applying the logic in international e-commerce situations as well."
According to KPMG, the Internet Tax Freedom Act (ITFA) Advisory Commission, established by U.S. Congress to examine issues pertaining to e-commerce taxation and other matters, could use the decision as a platform for recommending e-commerce taxes. The Commission met this month in New York and will reconvene in San Francisco in December and Dallas in March to discuss e-commerce issues. It will issue a final report in the Spring of 2000.
"The ITFA Advisory Commission is likely to consider the New York case as it evaluates alternative standards for determining nexus -- a state's jurisdiction to impose tax," said Don Griswold, national partner in charge, KPMG's State and Local Tax Technical Services. "Over the next nine months, the Commission will have the opportunity to hear experts on both sides of this issue debate the merits, and the final commission report will probably carry a good deal of weight in deciding this critical matter. If its analysis were applied to the field of state taxation, this case's dramatic expansion of traditional jurisdictional concepts would have a decisive impact on the future of e-commerce taxation. It is too early, however, to anticipate whether the Commission members intend to move so aggressively."