Caspe, Ma. Jesusa: The Taxability of Online Transactions and the Situs Thereof

SY 2008-2009, First Semester


With the rat race lifestyle of people today, more and more people are resorting to technology to accomplish day-to-day tasks that in the past required more time and attention. With the onset of the cyber world, it is becoming increasingly commonplace for people to conduct deals, transactions, and agreements through the Internet. It has then become possible for two people who live in two apart continents to conduct business without the requisite meeting in person and over dinner or coffee.

Among the prevalent practice today is buying and selling online, with both parties closing the deal through the Internet. Delivery is made through commercial couriers, and payment is also made online. This practice proves to have its advantages and disadvantages. For one, this is a convenient way to make purchases. Online payments through bank to bank transactions, credit cards, or pay pal make acquisitions easier.

However, unlike the traditional way of conducting commercial dealings with the parties “sitting down” and discussing the terms of the transactions and subsequently consummating the same with a paper proof of payment and delivery (receipts), online transactions are conducted through a computer, with an additional proof of the thread of conversations between the seller and the buyer.

According to statistics, in 1996 alone, the sale involving personal property in the United States alone reached an approximate amount of $500 million, which by estimation is 0.5% of consumer mail-order catalog sales. By the year 2000, this type of transaction has reached tens of billions of dollars already.


The term online is defined as “connected to, served by, or available through a system and especially a computer or telecommunications system (as the Internet)” or “an online database” or “something done while connected to such as system.” [1]

On the other hand, the term transaction is “a communicative action or activity involving two parties or things that reciprocally affect or influence each other” or “an exchange of or transfer of goods, services, or funds.” [2]

From the foregoing definitions, the term online transactions can be defined as “the exchange of or transfer of goods, services, or funds through a telecommunications system such as the Internet”.

Electronic commerce is “[a]ny commercial transaction conducted through electronic, optical and similar medium, mode, instrumentality and technology. The transaction includes the sale or purchase of goods and services, between individuals, households, businesses and governments conducted over computer-mediated networks through the Internet, mobile phones, electronic data interchange (EDI) and other channels through open and closed networks.” The Task Force’s proposed definition is similar to the Organization of Economic Cooperation and Development’s (OECD’s) broad definition as it covers transactions made over any network, and, in addition, it adopted the following provisions of the OECD definition: (1) for transactions, it covers sale or purchase of goods and services; (2) for channel/network, it considers any computer-mediated network and NOT limited to Internet alone; (3) it excludes transactions received/placed using fax, telephone or non-interactive mail; (4) it considers payments done online or offline; and (5) it considers delivery made online (like downloading of purchased books, music or software programs) or offline (deliveries of goods). [3]

Apparently, online transactions are part of electronic commerce. Electronic commerce is said to be the greatest economic revolution since the industrial revolution of the previous century. It made possible the more dynamic and widespread conduct of business, facilitating the easier and more convenient monitoring of the said business. Many economies prospered and markets bloomed with the breakthrough of this technology. With it gave rise to the various modes of conducting business such as outsourcing, telemarketing, and business processing distributed over different locations all over the world.

Online transactions are primarily conducted through the use of the Internet through the utilization of various Web sites which are in actual regular commerce known as intermediaries. These sites facilitate the conduct of business or commercial dealings. e-bay, numerous “multiply” sites, are famous markets for online transactions.

A typical transaction starts with the buyer accessing a certain Web site which offers selling the necessary items. Oftentimes, all relevant specifications are already included by the seller, consisting of descriptions and measurements of the commodity, the price of such item, and its photographs in every angle. The buyer scrutinizes the items, and if he/she finds the item satisfactory, an order is placed. The seller reserves the item and marks it as “no longer available,” and details of the delivery and payment are discussed. According to the details agreed upon by both parties, the buyer sends his/her payment, and upon receipt of payment, the seller delivers the item.

These transactions cover not only areas within the vicinity of a certain region but also far-reaching destinations such as those of different areas. Through these online transactions, it is made possible for persons who cannot afford to go across the country for the purchase of certain items. One click and the items are delivered right at the doorstep of the buyer.

This same advantage however could be a great disadvantage for states which want to maximize all revenues from all commercial dealings transacted by their residents or conducted within their territorial jurisdiction. Since these transactions would usually involve two or more separate taxing states with different tax systems, determining the taxability the taxability of these commercial dealings becomes a great issue. Primary to this is the fact that electronic commerce is done through circuits and the trail of these dealings could only be determined with impossibility.

This paper focuses on this issue and aims to lay down the basis for determining the proper situs of taxation of online transactions, buying and selling goods in particular, utilizing current laws related to the matter. Accordingly a glimpse at these laws regulating electronic transactions both in local and foreign jurisdiction was made.

III. Taxation of Online Transactions

The purpose of taxes in a society governed by democracy is to provide the financial resources for funding the government services that can be best provided collectively. As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very nature no limits. [4]

Tax is the lifeblood of the government. It is said that taxes are what we pay for a civilized society. Without taxes, the government would be paralyzed for lack of motive power to activate and generate it. Hence, despite the natural reluctance to surrender part of one’s hard-earned income to the taxing authorities, every person who is able must contribute his share in the running of the government. The government for its part is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power.[5]

It is through taxes that the state is able to fulfill its numerous duties and obligations. People pay taxes in exchange of the protection that the government provides for them. It is because of this premise that the collection of tax is a paramount power or right of the state, being one of the three inherent powers of the government.

In the Philippines, the National Internal Revenue Code of 1997 was drafted in a way that the importance of taxation for the support of government, the administration of the law, and the payment of public expenses is emphasized. As it is said, “taxability is the rule and the exemption is the exception.” This means that the issue of whether or not to tax a person or a transaction is basically construed in favor of taxation and any exemption that the taxpayer may have should have a lawful basis, which the taxpayer is obligated to invoke and prove. Moreover, these exemptions are never presumed and if granted by statute, the terms thereof must be strictly against the taxpayer and liberally in favor of the taxing authority. [6]

The taxing power of the sovereign is therefore so unlimited in force and so searching in extent. No attribute of sovereignty is more pervading. It reaches to every trade or occupation, to every subject or industry, to every species of possession, to every object. And online transactions may be such object. [7] With the fast rising growth of these transactions, a government may perceive the same as a good source of revenue and at the same time a threat for possible tax evasion. The growing debate of the exercise of the taxing power over these transactions in the present is inescapable, whether or not online transactions should be subjected to the payment of taxes.


The Interactive Services Association, which represents major Internet and Online companies, in a white paper released on December 20, 1996 has taken the position that taxation of Internet transactions is probably inevitable. Meanwhile, the Association of Online Professionals (AOP) is mounting an aggressive campaign to ban Internet taxation all together. James Butler, a leading online industry attorney who serves as counsel to the Association, has said “States are not allowed to impose taxes that would improperly restrict interstate and international commerce.” A recent AOP press release states that “AOP believes that a federal ban on inappropriate state and local taxes would send a clear signal to the states and provide the first effective relief from taxes that have already begun to impact the growth and stability of online commerce.” [8]

On the other hand, in the United States, on the subject of taxability of online transactions, “The Clinton Administration firmly believes that all parties can gain from a non-regulatory, market-oriented approach to electronic commerce. By acknowledging the unique characteristics of the Internet and avoiding undue restrictions, governments can take advantage of a historic opportunity and contribute to the growth of electronic commerce worldwide.” [9]

In order to ensure that the new technologies not be impeded, the development of substantive tax policy and administration in this area should be guided by the principle of neutrality. Neutrality rejects the imposition of new or additional taxes on electronic transactions and instead simply requires that the tax system treat similar income equally, regardless of whether it is earned through electronic means or through existing channels of commerce. [10]

For the part of, one of the well-known service providers for online transactions, it has previously filed a lawsuit before the New York Supreme Court on April 25, 2008, questioning the constitutionality of a certain statutory provision requiring Internet retailers with no physical presence in the state to collect and pay sales and use tax on purchases made by residents of New York. This is because claimed that contrary to presumptions, it did not “solicit” business by earning commission for the posting of advertisements containing links to by Web sites based in New York. The state of New York reportedly allotted in its budget another $50 million, which will come from the collection of sales taxes from retailers such as the on purchases online. A similar lawsuit was also filed by [11]

TO TAX: The Advantages of Subjecting Online Transactions to taxes

The proliferation of the market of online transactions serves as an opportunity for many states to move towards subjecting them to taxes to get additional revenues for the government. In accordance with the objective of this paper, a listing of the possible advantages of non-imposition of tax follows:

1. More jobs are created. Instead of allotting a certain portion of the business’ income
for the payment of tax, more employees may instead be employed.
2. Income taxes will grow because of # 1 above
3. This is beneficial for the consumers because of the lower price of items considering
that no taxes need to be paid.
4. Local economies will likewise be benefited because of the more steady flow of
business due to non-restriction of online transactions.
5. This will also be beneficial for small and medium-sized enterprises online. It will
encourage people who have insufficiency of capital needed for the usual expenses of
starting business to resort to online conduct of business because no such capital
resort to online conduct of business because of or a much lesser amount is needed.

NOT TO TAX: The Disadvantages of Subjecting Online Transactions to Taxes

The disadvantage of imposing tax on online transactions, specifically online shopping, was aptly described by an article saying that “[i]f electronic commerce is burdened by excessive government regulation and taxation, it could very well be that the opposite result will be achieved. Given that it is technologically feasible for the industry to invoke the self-protective mechanism of virtual presence in cyberspace, it is possible that electronic commerce providers will operate out of cyberspace with virtual presence out of state and perhaps out of the country. This would not be a WIN-WIN situation but rather a LOSE-LOSE situation.”

In the United States, the Internet Society, a leading international organization for the technical, economic, and policy development of the Internet, sent a letter to the White House stating that the imposition of taxes for online transactions should not be conducted at this point of time. This is because it will limit the industry considering that it is in its early stages of development. It was likewise postulated by the said organization that if the Internet is to be treated as the goose that lays the golden egg, the government should let the gosling grow into puberty before being asked to give up the gold.

In the article entitled “To Tax Or Not To Tax Internet Transactions” by Ted Laliotis, the author stated that “[e]lectronic commerce is at the infancy stage of an explosive growth potential. It is at the infancy stage because industry standards for electronic payment systems, privacy, and security are still in the process of being developed. This is the right time for industry and government to work together towards a WIN-WIN situation in accommodating the needs of the industry besides a hands off policy on taxation.”

The Internet Architecture Board and the Internet Engineering Steering Group in the United States wrote in a press release that “ready access to adequate cryptographic technology is a key factor to the growth of the Internet as a motor for international commerce and communications. Security mechanisms are now being developed by the Internet Engineering Task Force to meet these needs and depend on the international use of such technology…. Governmental restrictive policies are against the interests of consumers and the business community and are largely irrelevant to issues of military security and provide only marginal or illusory benefit to law enforcement agencies.”

If internet transactions are to be taxed, the question of situs of taxation comes into play.


Territoriality or the situs of taxation, which means “place of taxation”, is a limitation on the taxing power. This is so because the principle is well-recognized that, however broad the power of taxation may be as to its character and no matter how searching it is in its extent, such power is necessarily limited only to persons, property or businesses within its jurisdiction; that is to say, to subjects within its jurisdiction or over which it can exercise dominion.[12]

As aptly stated in decided cases, “all subjects over which the sovereign power of a state extends are objects of taxation but those over which it does not extend are, upon the soundest principles exempt from taxation. [13]

One of the paramount substantive issues raised on the taxability of online transactions is the determination of the situs of taxation or the jurisdiction by which the said transaction is to be taxed. If two or more countries are involved, more so that there is difficulty in knowing whose jurisdiction the sale is to be taxed. It is likewise important to reconcile the existing policies with the very nature of online transactions and make applicable the traditional concepts to source-based taxation.

From the foregoing, it is clear that the most logical kind of tax that can be collected is the tax on sales. For certain jurisdictions, a model for applying sales taxes to transactions involving catalog or mail-order sales is already in existence.


The current model obliges the seller to collect from the buyer the sales tax required by the state of residence of the buyer and to remit that sales tax to the state of residence of the buyer. However, the United States Supreme court has ruled that states have taxing jurisdiction over only those out-of-state sellers of tangible personal property who have nexus (sufficient physical presence) with the state. You can see how some people will argue that some Internet transactions deliver goods electronically where there is no physical presence or contact with the state and therefore, the state has no taxing jurisdiction.

As it was pointed out earlier, it may be difficult to locate the seller, or even the buyer, in cyberspace. It may be difficult to establish nexus. It may be difficult to remit taxes if the seller is located in some third world country. It may be difficult to establish exchange rates when standards get established for e-cash or digital money, or electronic money, whatever you want to call it. And it may be impossible to even detect a transaction if privacy and encryption standards get developed without the government at all levels holding the keys to decryption and the rights to snoop in data bases.

And then we ask the next question: Considering the variability of taxing methods among the states, the dependency on taxes for survival by the states, the general lack of understanding of technology by the preponderance of legislators, and the privilege of legislators to pass any law they want, is there a concern that legislation may be enacted that will impede, if not suffocate, the development of electronic commerce in some states, or even in the United States.

The answer is YES, there is a tremendous concern.

However, considering the global picture, we should keep in mind that currently the United State taxes income on the basis of both the source of the income and the residence of the person earning the income. US source income is subject to tax when earned by foreign persons as is the worldwide income of US citizens, residents and corporations. Source of income principles are generally similar worldwide. In general, the source of income is located where the economic activities creating the income occur. I the case of Internet transactions though it is not clear as to which of the following constitutes “economic activity” : the local modem of a service provider, commonly referred to as the point of presence (POP); the location of the server of the Internet Service Provider (ISP); the location of the server that holds the web page, the physical location of the warehouse that goods may be shipped from; or the physical location (residence) of the owner of the business. This picture will get even more complicated when standards for “digital” or electronic money are developed and transactions occur in such units in a global environment.

* Same-state Sales

If the physical location of your business and your customer are in the same state, you must collect sales tax on any purchases made by that person. Go by the address of the order. If you have more than one location, and you have a location in the same state as the customer, you must charge sales tax. For example, if you have locations in Ohio and Pennsylvania, and your customer is in Ohio, you must charge sales tax, even if the order is shipped from your Pennsylvania location.

* Different State Sales

If you are in a different state from your customer, you do not need to collect sales tax from that person, at this time, but states are currently pushing for a national online sales tax, because they are losing millions of dollars of revenue from these online transactions. In some cases, the consumer may be liable for the tax, but it is difficult to see how the tax can be collected from individual consumers. [14]


In the Philippines, taxation is apparently not the problem. There are two aspects of taxation, levy and administration. Levy is not an issue as it depends on the wisdom of the legislature. But for administering these taxes, there is an issue.

The basic consideration affecting situs of taxation is the protection. This is also a consequence of the symbiotic relationship of states and its citizens. Second, double taxation. But this is not a question. There can be no prohibited double taxation if the tax is imposed by different taxing authorities. It has been opined that if no constitutional provisions are violated, the power of the legislature to fix situs is undoubted. The principle that situs of taxation is determined by the situs of the sale may in some cases bow down to statutory rules depending on what situs policy the taxing power at a given point desires to pursue. The situs of the sale for tax purposes is not the place of where the contract of sale is perfected but the place of its consummation. [15]:

SEC. 23. Place of Dispatch and Receipt of Electronic Data Messages or Electronic Documents. – Unless otherwise agreed between the originator and the addressee, an electronic data message or electronic document is deemed to be dispatched at the place where the originator has its place of business and received at the place where the addressee has its place of business. This rule shall apply even if the originator or addressee had used a laptop or other portable device to transmit or receive his electronic data message or electronic document. This rule shall also apply to determine the tax situs of such transaction.

Situs of taxation of sale of goods and services adheres to the destination principle. In the case of Commissioner of Internal Revenue vs. American Express International, Inc., in determining the situs of the value added tax, the destination principle provides that goods and services are taxed only in the countries where they are consumed.

The State could only choose subjects for taxation which are under its jurisdiction. In this aspect, shall the purchase or sale made online be subject to its jurisdiction? When is an online sale consummated and where is it deemed to take place. These questions are relevant for the purpose of determining the proper situs of an online sale.

An online sale usually may start with placing an order electronically and paying in advance. Under our Law on Sales, delivery consummates a sale transaction. For purposes of taxation, a sale is subjected to tax upon actual and constructive delivery of the object of the transaction. Hence, since the delivery is effected here in the Philippines, the latter can subject the same tax.

On the other hand, transactions involving sales made in the Philippines through the Internet would always be subject to tax if made domestically. However, if made outside the country, then it may be considered as an export sale, subject to zero-rated tax.

Under this principle therefore, all goods and services purchased for consumption inside the territorial jurisdiction of the Philippines shall be subject to tax. On the other hand, income from these transactions is received outside the taxing jurisdiction of the Philippines. In this case, a question arises as to how this shall be administered.


On the issue of taxability of online transactions, the bigger question is not on whether it should or it should not be taxed, the question dwells on the administration of a law requiring the payment of taxes for such transactions. From the foregoing discussions, it is clear that the imposition of tax to online transactions is backed up by the existence of pertinent laws encompassing the same. Being a transaction on sales, the state has the power to collect taxes and charges for the conduct of such business.

The question comes in on how the abovementioned can be implemented. Just like other laws and regulations on taxes, its imposition should start with the enactment of an enabling law giving the government such power. Because the nature of the transaction which is to be taxed is novel, the said laws and regulations should conform with the character of the transactions. In tackling the enforceability of the proposed law, it should specify the necessary criteria for the determination of taxable transactions within the purview of online commerce and set the standards for its implementation. There should also be established a reporting system by which such online commerce is monitored, which may include the registration of persons who are already engaging or are interested to engage on online commerce.

Among the most important and sensitive provisions of the proposed law is the stipulations on the assessment of the taxes payable inasmuch as the transactions are conducted through electronic means. Therefore, there is a need to incorporate measures by which the electronic transactions are strictly monitored to prevent possible tax evasions and other offenses.

The law should likewise include a department under the Bureau of Internal Revenue to implement in behalf of the state the provisions of such proposed law. And just like all other laws regarding the payment of taxes, penal provisions shall also be included to deal with possible tax offenses.

Finally, although this paper has taken the position that taxes should be imposed on online transactions, it is likewise postulated that such imposition of taxes, aside from conforming with the constitutional mandate of being fair, equitable, uniform, not capricious, and not arbitrary, should also take into consideration the possible effect that such collection of taxes might have in the industry of online commerce. The imposition of taxes should therefore be carefully studied to the end that it will not cause the early demise or suppression of the still growing industry.


[1] Merriam-Webster’s 11th Collegiate Dictionary

[2] Ibid.

[3] National Statistical Coordination Board Task Force on the Measurement of E-Commerce

[4] Mactan Cebu International Airport Authority vs Ferdinand Marcos, GR 120082, September 11, 1996

[5] Commissioner of Internal Revenue vs. Algue, inc., GR No. L-28896, February 17,1988

[6] Bibiano V. Banas vs CA, GR No. 102967, February 10, 2000

[7] Francis A. Churchhill vs Venando Concepcion, GR 11572, September 22, 1916

[8] Ibid.

[9] Ibid.

[10] Ibid.

[11],LLC vs. New York department of Taxation and Finance

[12] Shaffer v. Carter, 252 US 37, cited in Benjamin B. Aban’s law of Basic Taxation in the Philippines

[13] Curry vs. McCanless, 307 US 357, cited in Benjamin


[15] The Shell Co. of the Philippines, Ltd. Vs. Municipality of Sipocot, camarines Sur, 105 phil. 1263 cited in B. Aban page 64


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