Solving the e-commerce tax riddle

Retailers should be freed from the burden of collecting tax on web sales
OECD Centre for Tax Policy and Administration

Burst bubble or not, the digital economy continues to grow, as mainstream businesses move transactions online and e-commerce specialists such as Apple’s Music Store, e-Bay and Amazon thrive. That makes governments keen to collect taxes on online sales.

In particular, they are eyeing major growth in the market for downloaded products, now that broadband is being rolled out. With some companies in the segment reporting a trebling of sales in the last 12 months, governments want to head off the development of a tax-free zone for online sales.

Indeed, the European Union’s new rules on value added tax (VAT) for e-commerce came into force on 1 July 2003. The EU created an online system for businesses based outside the Union to pay taxes on web sales to EU citizens. A host of other countries are likely to follow suit with their own rules.

If they do, businesses will suddenly face a hodgepodge of government tax collection mechanisms. The resulting complexity could overburden firms – especially small and medium-sized ones with limited resources – and stifle the development of cross-border e-commerce.

Collecting tax for online sales is a hard nut to crack, especially when it comes to products such as software and music that can be pulled off the web from anywhere in the world. In 2001, OECD countries agreed that consumption taxes for purchases made online should be paid in the customer’s country of residence, no matter where the retailer is based. If, for instance, a teenager in Hamburg downloads a song from Music City’s server in the US for 99 cents, the company should collect Germany’s 16% VAT and send it to the German tax authorities. But businesses in the US, or anywhere else for that matter, are likely to bridle at the prospect of collecting tax for dozens of countries half a world away.

Is there an easier way? Only if countries break out of their traditional practice, which places the burden of collecting taxes on the retailer, rather than the buyer. To move forward, governments and businesses must collaborate to create a new approach that is simple and cost-effective. Governments must commit to reducing the administrative burden on companies, while the business community should explore innovative, technology-based alternatives to the current system.

One alternative, for instance, might be for traditional payment services with well-established global reach, such as credit card companies, to expand into the new business of collecting and distributing VAT receipts. Another might be for the newer online payment specialists such as e-Bay’s PayPal, which handles online auctions, to step in. Of course, privacy and security issues would need to be addressed so as to protect both consumers’ rights and those of tax administrations.

Such big shifts will not happen overnight. At present the volume of global retail trade in digitised products probably does not warrant the sort of investment that would be required to design, build and operate sophisticated new tax collection systems. But the pressure for change is likely to grow quickly as the economic recovery gains momentum and the market for downloaded products accelerates.

A new system might be adapted for other uses, such as collecting customs duties on the millions of dollars in goods shipped internationally. Rather than the customer getting a nasty shock when the postman turns up with a package and demands US$20 for customs duty (plus a US$5 administration fee for the pleasure of paying), payment would be collected when the order is made. That approach already works successfully for retail trade between Canada and the US.

No matter what the final solution, it is high time for some radical thinking on how governments and business can ensure compliance with tax rules, while at the same time making it easier for retailers to reach across borders. The OECD will be working with business people as well as governments over the coming months to kick-start this brainstorming. Finding solutions will help spur the development of new distribution channels for everything from software to videos, which would be music to most people’s ears – including our teenager in Hamburg.


Holmes, D., “E-commerce tax: A sober view of cyberspace”, in the OECD Observer No 230, January 2002.

©OECD Observer No 239, September 2003

Economic data


Stay up-to-date with the latest news from the OECD by signing up for our e-newsletter :

Twitter feed

Suscribe now

<b>Subscribe now!</b>

To receive your exclusive paper editions delivered to you directly

Online edition
Previous editions

Don't miss

  • Read some of the insightful remarks made at OECD Forum 2017, held on 6-7 June. OECD Forum kick-started events with a focus on inclusive growth, digitalisation, and trust, under the overall theme of Bridging Divides.
  • Checking out the job situation with the OECD scoreboard of labour market performances: do you want to know how your country compares with neighbours and competitors on income levels or employment?
  • Trade is an important point of focus in today’s international economy. This video presents facts and statistics from OECD’s most recent publications on this topic.
  • How do the largest community of British expats living in Spain feel about Brexit? Britons living in Orihuela Costa, Alicante give their views.
  • Brexit is taking up Europe's energy and focus, according to OECD Secretary-General Angel Gurría. Watch video.
  • OECD Chief Economist Catherine Mann and former Bank of England Governor Mervyn King discuss the economic merits of a US border adjustment tax and the outlook for US economic growth.
  • Africa's cities at the forefront of progress: Africa is urbanising at a historically rapid pace coupled with an unprecedented demographic boom. By 2050, about 56% of Africans are expected to live in cities. This poses major policy challenges, but make no mistake: Africa’s cities and towns are engines of progress that, if harnessed correctly, can fuel the entire continent’s sustainable development.
  • OECD Observer i-Sheet Series: OECD Observer i-Sheets are smart contents pages on major issues and events. Use them to find current or recent articles, video, books and working papers. To browse on paper and read on line, or simply download.
  • How sustainable is the ocean as a source of economic development? The Ocean Economy in 2030 examines the risks and uncertainties surrounding the future development of ocean industries, the innovations required in science and technology to support their progress, their potential contribution to green growth and some of the implications for ocean management.
  • The OECD Gender Initiative examines existing barriers to gender equality in education, employment, and entrepreneurship. The gender portal monitors the progress made by governments to promote gender equality in both OECD and non-OECD countries and provides good practices based on analytical tools and reliable data.
  • They are green and local --It’s a new generation of entrepreneurs in Kenya with big dreams of sustainable energy and the drive to see their innovative technologies throughout Africa.
  • Interested in a career in Paris at the OECD? The OECD is a major international organisation, with a mission to build better policies for better lives. With our hub based in one of the world's global cities and offices across continents, find out more at .

Most Popular Articles

OECD Insights Blog

NOTE: All signed articles in the OECD Observer express the opinions of the authors
and do not necessarily represent the official views of OECD member countries.

All rights reserved. OECD 2017