ABSTRACT
The problems concerning the application of consumption taxes on e-commerce are generally recognized as having more immediacy than the issues concerning direct taxation. This chapter will examine generically two different tax systems and the effect on them of e-commerce: the European VAT and the US sales and use tax. The chapter begins by describing the effect of direct e-commerce on VAT. Most of the current VAT rules were developed at a time when the ability to digitize and deliver goods and services cross-border was limited. This section of the chapter will include a descriptive account of the serious dysfunction of the present VAT rules by closely scrutinizing the application thereof to electronic supplies. In order to have an effective international system of VAT in the context of cross-border trade, the rules must be capable of answering three questions with respect to a particular crossborder supply transaction: (i) Is the transaction subject to tax? (ii) Who is required to pay the tax? (iii) To whom should the tax be paid? However, answers to these questions will differ frequently depending on whether the supply at issue is classified as a good or a service and, if as a service, into which category of service it falls.
