Back to TaxationIn addition to sales or use tax implications, electronic commerce raises important corporate income tax questions concerning the apportionment of income to the various states. Most states impose a corporate level tax on income derived from business activity, including electronic commerce. However, there are variations among the states in the approach taken in sourcing where income is earned.
In determining taxable income for corporate income tax purposes, most jurisdictions employ an apportionment formula generally comprised of a payroll factor, a property factor, and a sales factor. Generally, the sales factor is the apportionment factor most impacted by electronic commerce. As with the sales or use tax, the classification of the product being sold may result in different treatment for sales factor purposes. The classification of the product sold may also have an impact on the application of the throwback sales rules.
For corporate income tax purposes, states generally have not taken a position on whether sales of software or other "content" on-line will be considered the sale of tangible personal property or the sale of services/intangible property. Some states may tax the electronic transfer of products as the sale of tangible personal property. To the extent that such sales are considered sales of tangible personal property, they will be sourced according to the usual "destination" rule, where the customer is located.[Ferguson,1998]
It is likely, however, that most states will treat such products as a sale of services or intangibles. States generally adopt this "intangible" classification using the same reasoning applied to sales and use tax - that the electronic content can not be "seen, measured, or touched." To the extent that such sales are considered sales of services-intangibles jurisdictions apply varying rules for sourcing these sales.
The vast majority of states source these sales to the place where the vendor is located. In these states, the sourcing rule will look to where the income producing activity is performed, based on the costs of performance. A minority of states will source the sale of services/intangibles to the jurisdiction where the consumer is located. In these states, the sourcing rule is based on where the benefit of the service/intangible is received.
Electronic commerce also enable individuals and companies to transfer earned revenues to other domains, thereby reducing state income taxation.[Bonnet,1998]
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[Bonnet, Tom] Preserving state sovereignity in the information age. State Legislatures, June 1998 v24 n6 pS1[back to text]