How to change tax laws to reflect the globalisation through the Internet is a problem that many governments are grappling with. The fear is that the Internet may cause significant reductions in tax revenues to national or local governments if existing laws do not cover changes in purchasing patterns. In Europe, the use of online betting in lower-tax areas such as Gibraltar has resulted in lower revenues to governments in the countries where consumers would have formerly paid gaming tax to the government via a betting shop. Large UK bookmakers such as William Hill and Victor Chandler are offering Internet-based betting from 'offshore' locations such as Gibraltar. The lower duties in these countries offer the companies the opportunity to make betting significantly cheaper than if they were operating under a higher-tax regime. This trend has been dubbed LOCI or Location Optimised Commerce on the Internet by Mougayer (1998). Meanwhile, the government of the country from which a person places the bet will face a drop in its tax revenues. In the UK the government has sought to reduce the revenue shortfall by reducing the differential between UK and overseas costs.
The extent of the taxation problem for governments is illustrated by the US ABC News (2000) reporting that between $300 million and $3.8 billion of potential tax revenue was lost by authorities in 2000 in the USA as more consumers purchased online. The revenue shortfall occurs because online retailers need to impose sales or use tax only when goods are being sent to a consumer who lives in a state (or country) where the retailer has a bricks-and-mortar store. Buyers are supposed to voluntarily pay the appropriate sales taxes when buying online, but this rarely happens in practice. This makes the Internet a largely tax-free area in the USA.
Since the Internet supports the global marketplace it could be argued that it makes little sense to introduce tariffs on goods and services delivered over the Internet. Such instruments would, in any case, be impossible to apply over products delivered electronically. This position is currently that of the USA. In the document 'A Framework for Global Electronic Commerce', President Clinton stated that:
The United States will advocate in the World Trade Organisation (WTO) and other appropriate international fora that the Internet be declared a tariff-free zone.
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