1.       Introduction

The Internet has created a world without borders. Consumers can purchase goods and services from around the world without necessarily traveling to that part of the world. As a consumer, one can go online, and compare shop prices for whatever he wants. Such goods may range from computers, cars, books, or whatever and make his purchases, all tax-free (unless the vendor has a physical presence in any State). The recent introduction of electronic payment systems in Nigeria is reflected in use of internet banking, automated teller machines (ATMS), electronic funds transfer and E-taxation through the use of personal identification number (PIN). E-payment systems refer to all payments that are completed using some form of electronic communication technology such as debit or credit cards, internet direct debit, prepaid cards, value cards etc.
2.       Definition of E-Commerce

E-commerce can be better understood when it is defined from various perspectives. From a communications perspective, e-commerce is defined as the delivery of information, products, services or payments made via telephone lines, computer networks or any other means.[1]

From business process perspective, it is defined as the application of technology towards the automation of the business transactions and workflow[2]. From service prospective, it is defined as the tool that addresses the desire of the firm, consumer and management to cut service costs, improve quality and to reduce the service delivery time[3]. From online perspective, e-commerce provides the capability of buying and selling products and information on the Internet and other online services. E-commerce broadly pays emphasis on the generation and exploitation of the new business opportunities by using phrases such as, “generate business value” and “do more with less”.[4] It endeavours to improve the online business transaction execution by providing better quality of service.

The effect of this improvement results in the creation of more effective performance, greater economic efficiency and rapid exchange, thereby generally resulting in profitability of business. E-commerce is to view it as a production process that converts digital data into value added outputs to a set of intermediaries. The ability to complete payments with confidence is critical to the efficient functioning of the electronic transaction, market place and therefore to the development of the e-commerce generally. E- Commerce law entails the following[5]

·        E-Transaction

·        E-Signature

·        Authentication & Security

·        Cyber Crime

·        Online Consumer Protection

·        Online Privacy

·        Data Protection

·        Trademark

·        Copyright law

·        Patent law

·        Database protection

·        Domain name law

·        Competition law

Depending on how e-commerce is applied, it has the capability of increasing revenue by creating new markets for old products, creating new information-based products, establishing new service delivery channels to better service and interaction with customers.

Electronic business generally takes place between at least two groups or individuals. The group or individual which is consuming the services or buying the products is called the buyer and the group or individual which is providing the service or product at a price is called the seller. As the name suggests, e-commerce takes place on a Network location. The transaction can be processed either through Web sites or by confirming e-mails.

It has touched all aspects of business such as  technology infrastructure, business-to-business commerce, business-to-consumer commerce, business portals, new business models, the growth (and decline) of tech stocks, new marketing and advertising strategies, and interesting strategic alliances and partnerships. One can even look for the arrival of new models, new strategies, and new relationships not under consideration at present on the web.

3.       Should the internet be taxed?

The economic furnace generated by Internet sales has, not surprisingly, caught the attention of business executives as well as local, state and federal political leaders. Existing tax laws were not developed to face the significant changes that continue to take place with the emergence of the Internet or “New” economy.

The Internet allows anyone with Net access to make purchases from anywhere in the world. How do you tax goods purchased online from consumers who do not reside in the state or country where the vendor has set up shop? The most pressing question one might assume is whether internet transactions should be taxed. Existing laws governing state and local taxation are being challenged in ways no one anticipated.   If the answer is, “Yes — Internet sales should be taxed,” then how do you develop a system that will make it easy, painless, and fair to all groups involved? How can you police compliance, while continuing to support the growth of the Net? One thing that is certain is that this will not be easy.

Potential tax revenues from Internet commerce are huge and may run into billions and billions of naira. And it should come as no surprise that state governments want to tap into this new source of revenue to pay for schools, roads, and critical infrastructure. Taxation of anything is a constant political hot potato, and taxation of Internet commerce has proved no exception[6]. Likewise, it should come as no surprise that an important group of politicians (both at the federal and state levels) and cyber- and technology business leaders oppose taxation of the Internet since it creates a humid ground for tax evasion possibilities.

4.       Challenges of E-Commerce

a).      Internet and Computer Age

The concept of e-commerce/internet transaction is relatively new and fast developing in the world commerce and has affected the role of communication in reducing the world into a global village. There are yet to be put in place new rules for the treatment of the income from e-commerce/transactions done via the internet.[7] According to Arogundade[8], it would appear that the well established old concept of Permanent Establishment (PE) in Double Taxation Agreements (DTA) parlance, that the jurisdiction of a source country to tax profits from foreign trade carried on by non-resident company of one country must have sufficient presence in another country to be liable to tax in respect of its profits from business operations in the other country would not be applicable to e-commerce.[9] This is because, access to internet has nothing to do with physical location.

b).     Lack of Physical Location

The problem posed by the inapplicability of PE to e-commerce is that it is a transaction done via the internet website. A website cannot qualify in terms of spatial and temporal location because of its intangible nature, since it is a combination of software and electronic data. Thus, the operations of e-commerce are clearly exempted from the scope of source taxation, since source cannot be determined in terms of place[10].

E-commerce technology “epitomizes borderlessness, and irrelevance of being in a particular physical location.”[11] The problem posed by this is the possible impact e-commerce may have on the revenue-base especially as the e-trader would only be taxable on PE threshold which is impossible as earlier stated. This in turn “will allow unwilling taxpayers to hide more easily”, especially in the areas of products like music, retail and book industries.

The Economist highlighted the problems of e-commerce in the following words[12]:

“Today’s tax system relies on knowing where a particular economic activity is located. But the internet may enable individual workers to operate in many different countries while sitting at the same desk.

          The advancement in technology such as e-commerce has been a challenge to tax administrators in the area of combating tax evasion and cross border transactions.

The following problems were further highlighted by Arogundade:

i.                    the interplay of the technology of encryption which may aid tax evasion and money laundering;

ii.                 the elimination of the agency role of middlemen as traditional source of information to the tax man;

iii.               Shift from paper-based records to electronic records which can easily be kept out of reach of the tax man.[13]

c).      Software Conversion

          The problem posed by the tax treatment of the year 2000 Computer Software Conversion gained prominence in early 2000 among financial institutions in Nigeria and other companies. The software conversion was borne out of the need for the private and public sectors at the time to reluctantly incur the additional costs of updating computer software so that it properly functions after 1999. It was believed that computer systems and software’s were programmed to start with the digit 1 and not 2 and therefore might not function properly after December 31, 1999. Furthermore was its failure to recognize a year input as “00”.There was the rumor that systems not having been configured to work in the new millennium might crash.[14] The general fear was that the computer would crash as it would, instead of 2000, revert to 1900 when computer was not recognized.

In the United Kingdom, Software acquired under a license is normally treated as belonging to the trader as long as he is entitled to the right, while computer software is treated as being machinery or plant; even though, the meaning of “computer software” is yet to be determined by the Court.[15]

          In Gray v. Seymours Garden Centre[16]the English Court of Appeal considered a claim for plant and machinery allowances in respect of planteria, which is a form of “high tech” glasshouse used in a garden. The Court in rejecting the claim held that “the cold frames which formerly provided a similar function to the planteria itself had been disallowed.”

          However, in the United States case of United Stationers v. United States[17] the Court disallowed the taxpayer’s internal-use software development research tax credits on the basis that the activities

(1) Were not technological in nature nor were they to expand or refine existing principles of computer science?

(2) Not for experimentation and as such did not meet the requirements of qualified research so as to qualify as deductible tax allowance.

In Nigeria, there is no judicial pronouncement on this issue, but the Courts are likely to follow the decisions from the other jurisdictions cited above if faced with a similar situation. In view of the foregoing, and due to the non-responsiveness of FIRS to taxpayers as per 2000 software conversion costs, it would appear that this matter was not resolved and that each taxpayer was at a liberty to treat same as allowable expenses, exempted from tax.

However, it has been observed generally that tax avoidance is on the increase by large business firms, who adopt sophisticated strategies for circumventing tax laws. In other words, tax avoidance is on the increase than tax evasion.[18]

d).     Difficulty of Fund Audit Trail

          It would appear that the scorge of Internet Banking poses the challenge of making tax audit trail very difficult. Also, the e-payment technology which assists in easy movement of funds without trail also occasions another challenge to tax administration.[19]

It is also important to note the issue of Scratch Cards introduced recently by almost all organizations for recruitment, University admissions, checking Joint Admissions and Matriculation Board JAMB and School Leaving Certificates Examination results in the country is deplorable. Huge amounts of money are realized through the sale of these scratch cards without tax being paid on these transactions thereby occasioning huge revenue loss to government.[20] A lot of recharge cards are sold daily for use by customers of various GSM providers like MTN, Globacom, Etisalat, etc. There is no evidence of tax payments by such customers.

These big taxpayers/avoiders have the means to employ sophisticated accounting firms to engineer new derivative products for their clients that would not be apparent to tax authorities or that would not run foul of the existing tax laws.[21]

For instance, if a Nigerian Subsidiary of a transaction company wishes to buy components from another subsidiary of the same corporation based in South Africa, there exists computer software to show exactly how to route the purchase through a chain of subsidiaries to minimize tax liability.

Thus, the emergence of e-commerce and other technological development has enhanced capabilities of the big players in the economic world to engage in financial engineering geared towards threatening the companies’ tax base.

e).      Corruption

There is a huge loss in tax revenue accruable to government, as tax authorities face enormous challenges in collecting taxes from those who owe them. For example, lawyers who take cash for a Saturday office visit; waiters who receive most of their income as tips; landlords who collect rent in cash; small business people who conceal part of their profits or hire people off-the books.[22]

The combined effects of information technology on the ever increasing e-commerce transaction would not allow those who have been able to hide in the cash based or shadow economy to evade paying their taxes or disappear altogether.

Many eligible taxpayers cannot be identified within a single national jurisdiction so that sometimes their foreign incomes cannot be traced for tax purposes as they are hidden in  foreign bank accounts. Property is becoming increasingly intangible and consumption difficult to locate can be shifted relatively easily between jurisdictions. In view of the foregoing, one can then ask the question, where lies governments’ continued ability to levy taxes in a world in which companies, assets, people are infinitely mobile, and information technology and e-commerce transactions are increasing?[23]

There is a need to device strategies for curbing or reducing loss in tax revenue occasioned mainly by tax evasion and corruption. One of the ways is to fight against corruption. The Federal Inland Revenue Service has declared a war on corruption by employing the role of “whistle blowers” who would raise alarm by reporting to FIRS management on any perceived act of corruption.[24]

Tax Administrators should device means of tackling the following sharp practices which occasion huge revenue loss to government:

(a)  Failure to charge correct rates of Withholding Tax WHT and Value Added Tax VAT on transactions

(b) Misclassification of transactions resulting in under-remittance

(c)  Illegal retention of WHT, VAT and Pay As You Earn PAYE funds after deduction have been duly made and ploughing back such funds to execute contracts.

(d) Failure to charge the correct rates of PIT on resultant chargeable incomes of employees and

(e)  Practical or non-remittance of PAYE deductions made from employees’ Salaries/Emoluments.

Total compliance with the relevant provisions of the tax laws were meant to safeguard against the above leakages. For instance, Section 40 of the FIRS Act imposes a general obligation on agents to deduct and remit taxes in accordance with specific provisions of the various tax laws. While it is an offence to deduct and fail to remit to the service within 30 days, such an offender is to pay the tax withheld or not remitted in addition to a penalty of 10 percent per annum and interest at the prevailing Central Bank of Nigeria rate or to a jail term of 3 years.[25]

Section 13 (1) of the VAT Act, imposes an obligation on Ministries, Departments Agencies of government to withhold VAT at source on all payments and remit to the FIRS.[26]

It is worthy to note that the provisions of these tax laws are not complied with, thus, tax administrators should ensure that the full sanctions and penalties ranging from imprisonment to payment of penalties and interest under the relevant tax laws[27] are employed to fight loss of tax revenue due to government and also to serve as a means of deterrence to tax defaulters. The adequate sensitization, enlightenment and education of the tax payers and the general public would help reduce the loss of revenue due to government. The FIRS has devised many forms of enlightenment through the media, workshops and adverts.

f).      Alternative Payment Methods

Tax authorities are often faced with diverse problems ranging from delay, diversion and non-remittance of funds collected on its behalf by government agencies and this sometimes occasions great loss of revenue to government.[28] The problems were due largely to errors in the manual payment process, lack of unified and easily manipulated system employed by collecting banks.[29]

In order to combat this surge, FIRS introduced Project Fact in 2007 to herald the introduction of automated payment system at any of the FIRS designated Collecting Banks such as First Bank, Zenith Bank, Oceanic Bank and Union Bank, so that collections could be tracked on-line from all the FIRS offices. Daily, Interswitch sweeps collected funds from the collecting banks to the FIRS Account at the Central Bank before it hits the Federation Account and other designated accounts as the case may be eg VAT Pool Account is designated for VAT Collections.[30]

Tuesday May 19, 2009 marked the birth of a new tax payment regime in Nigeria with the introduction of FIRS online payment of all types of tax. On that day, First Bank Plc recorded the first online payment by ITECO Nig. Ltd on the FIRS portal (www.firsonline.com.)[31]

Under the new online payment all a taxpayer is required to do is to obtain a taxpayer Identification Number, an FIRS e-tax card from the bank of his choice, log on the FIRS website www.firs.gov.ng, then click on make online tax payment and follow the prompt, until payment is made using the FIRS tax card only.[32]

Hence, the payment of taxes to Federal Inland Revenue Service is now easier as taxpayer completes the requisite tax form or prepares the beneficiary schedule for WHT tax payments. This can be a physical form, or completed online on the FIRS web portal. Thus, payments are now user-friendly, convenient, efficient and without encumbrances.

It is recommended that all States and Local Government tax revenue bodies should take a cue from the automated system/e-payment tax collection so as to enhance quality of governance and to support tax payment compliance.[33]

g).     Shift to Consumption Tax

It is submitted that the VAT is the most efficient progressive form of tax in Nigeria since it borders on the purchasing power of persons. Accordingly, those with a strong purchasing capacity will suffer a higher tax burden than those with a relatively low purchasing capacity. This principle is in tandem with some of the good qualities of tax to- wit, equality and fairness.

It is also submitted that a uniform rate of 5% imposed on taxable goods and services is inappropriate. Some goods and services, which are of considerable risk or goods and services that are merely luxurious, should have a higher VAT rate. For instance the rate of tax on tobacco, alcoholic liquors, the importation of exotic cars, betting, gaming and lotteries, petroleum products e.t.c. should have been higher than other goods and services so as to discourage  high consumption of such items.

It is hereby suggested that Nigeria should adopt the multiple rate model rather than the present single rate system in operation.

Accordingly, items 6, 7, 8, 9 and 10 of the 1st schedule to the Act should be subjected to a higher VAT rate than other goods. Item 2 (which relates to imports) should be properly classified in order to determine specific goods imported for the purpose of levying proportionate VAT on them. For instance, importation of foreign furniture and office accessories, exotic cars, foods and beverages, alcoholic liquors and other similar goods imported into Nigeria should proportionately be charged higher VAT than others.

The above submission is consistent with tax practices elsewhere as history also, shows that most developed countries in Europe also charge higher taxes on such goods and services.[34] It is worthy to comment on the nagging question as to whether the states have the power to levy Sales Tax side by side the Value Added Tax which is a Federal Tax applicable to the entire country.

There are a lot of arguments emanating from the purported imposition of Sales Tax by Lagos State in 2004 which was challenged in Court by UAC and its subsidiary in UAC v. The A.G LAGOS STATE[35]. In the view of Olumide Obayemi[36] while relying on the decision in A.G Ogun State V. Alhaji Ayinke Aberuagba & Ors,[37] since Nigeria is a Federal State with each tier of government having its own authority and legitimacy, principles of federalism require that business transactions within the territories of individual Nigerian states may not be subject to a Federal Tax”. Thus he advocated the repeal of the VAT. The opinion expressed above was also echoed by Chukwuka Ikwuazom[38] based on the same facts and principles expressed by Obayemi.

It is however pertinent to observe that Aberuagba’s case was decided on the basis of the 1963 Constitution which expressly shared the powers to levy Sales Tax between the Federal Government and the State. That is unfortunately not the situation under the 1999 Constitution as can be clearly shown in the discussion taxing powers. Both the 1999 Constitution and the Tax and Levies (Approved List for Collections) Act of 1998 being a subsisting law do not authorize States to levy Sales Tax.

Secondly, by virtue of the doctrine of covering the field, since the VAT is a Federal Tax which has already covered the field of Sale Tax having the same base with Value Added Tax (i.e. sale of goods and services) any further exercise of power by a state government in that regard would amount to a nullity.

Apart from the legality or otherwise of States Sales Tax legislation, that exercise would produce enormous economic and commercial problems which have already been taken care of by the VAT. First, the issue of double taxation would be resuscitated, since both the Sales Tax and VAT proceed from the same base. Secondly, the vexed issue of e-commerce for internet purchase or inter-state purchases. The nagging question that will arise from here is which State is to collect tax for the sales? Would it be the State from which the goods have been purchased or the State in which the purchaser is domiciled? If it relates to an internet order, which State would receive the tax?

These complications inherent in the operation of multiple Sales Tax Laws have been the bane of sales taxation in the United States of America[39] since issues have already been resolved by the extant VAT, it is unnecessary resorting back to the regime of individual States Sales Tax which would reintroduce these problems.

Under the VAT, all imports (whether ordered from main street shops or via the internet) are taxable or VAT able. The Nigerian Customs Service collects VAT on all imports at all designated ports. VAT does not suffer the confusion inherent in inter-state transactions in the U.S.A. where there are multiple Sales Taxes. Under the VAT, each registered individual or firm pays VAT according to the prescribed rate, irrespective of whether or not the purchaser lives in another state.

Perhaps the only obstacle that could defeat the collection of VAT is where a VATable service is rendered online. In this case, the tax authorities may not be in a position to know the transaction let alone tax it, it is my opinion that Cyber-services should be linked with place of physical collection or consumption of goods rather than place of concluding the contract so as to determine which state collects.. This submission is informed by our level of technological attainment, as it would be extremely difficult tracking Cyber-services. This is however, a challenge of the 21st century taxation.

Furthermore, most enterprises in Nigeria today are not registered with the FIRS for the purposes of VAT just as a host of other small companies are not. It is hereby suggested that the Corporate Affairs Commission should have a VAT unit for the purpose of registering every company or business name registered under the Companies and Allied Matters Act.

h).     Adequate Sensitization and Education by Tax Authorities

          There is lack of education of taxpayers by the various tax authorities especially by the Local Government Revenue Committees. In fact there is total absence of tax education and public enlightenment for taxpayers at the grass root level.[40] In Nigeria where the total population is over one hundred and fifty million, it is sad to note that only over 50 million Nigerians are  literate.[41] Out of this literate portion, only a minute number can operate the computer.

          Due to the high level of illiteracy, there is the prevailing ignorance about taxes, rates and levies imposed by the various Local Governments. Often times, the procedure for assessment, and objection to assessments, appeals and tax payers’ rights are unknown to taxpayers at the local government level.[42]

          In the ongoing reform at the FIRS, tax payers’ education and enlightenment is a priority as noted by the Executive Chairman FIRS, Mrs. Ifeuko Omoigue-Okauro. She stated that “FIRS has unveiled new tax payment system through the use of Tax Payer Identification Number (TIN), electronic cards, issuance of e-tickets and on-line payment aimed at improving tax administration in Nigeria”.[43]

          Uviomo Akpo noted that tax education and public enlightenment by the FIRS is far below expectation. Consequently, there is gross ignorance about taxation in areas such as VAT, company taxation, stamp duties, Capital Gains etc.[44]

          He further suggested that all State Boards of Internal Revenue should engage themselves in giving the public proper Tax education and enlightenment. So as to build up a culture of voluntary compliance through the process of subliminal perception-a process where the taxpayer subconsciously picks up a message that is constantly repeated.[45]

          In other words, lack of public enlightenment and education on tax would create an in-effective administration of taxes and would occasion a loss in revenue to government. Where a tax payer does not understand his tax liability easily and correctly his chances of complying would be very low.[46] Lagos State seems to have taken a cue from this and has gone into massive tax awareness campaigns showing clearly what tax can do for the masses. This has brought about the popular slogan ‘Eko o ni ba je o’ meaning Lagos will not be destroyed which is chanted by all Lagosians as a motivation for payment of taxes.

i).      GSM Regime

In Nigeria, General Olusegun Obasanjo’s Administration[47] marked the advent of Global System of Mobile Communication (GSM) and therefore, tax holiday was granted GSM operators by that administration to encourage their pioneer industry. However, there are recent calls and clamours from the National Assembly and the Nigerian populace that this tax holiday amounts to huge loss of revenue to government, against the backdrop of poor services currently rendered, high tariff rates, and huge profit.[48]

To this end, the House of Representatives in 2010 initiated through Dirro Melaye a probe of the Nigerian Communications Commission (NCC) over the loss of revenue on tax holiday granted GSM operator providers in Nigeria by the last administration. Their argument was that a tax holiday in addition to the excessive profit was an unnecessary leakage as those operators will continue to operate with or without the tax holiday.

          Also worthy of mention, is the issue of the remittance of the Value Added Tax included in the cost of air time vouchers/cards sold by GSM Providers. There is no proper accountability and effective remittance structure in place for the collection and remittance of VAT charged on airtime vouchers/cards in total disregard of the VAT Act and thereby occasioning huge revenue loss to government.

The National Communication Commission (NCC) announced plans to register all SIM Cards of mobile telephone users on or before 31st December 2010.[49] This is aimed at curbing criminality. Currently there are over 40 Million subscribers to the MTN lines in Nigeria[50]. The proposed registration should be able to capture the entire detail of the subscribers to all providers with information ranging from name, address, age, occupation and other information relating to finger prints, photograph and the person’s biometrics generally.

          This data would serve as a good working tool in the hands of tax administrators in monitoring VAT charged on airtime vouchers so as to put a proper structure in place for collection of VAT charged on airtime voucher and the tax treatment of other GSM transactions. It is interesting to note that the deadline for registration has come and gone but nothing has yet happened to the lines of those who have failed to register.

j).      E-Taxation/Data Base Development

The introduction of internet tax payment known as E-payment via the FIRS Portal has been introduced for Tax Payers thereby making all forms of tax payment less cumbersome, more efficient and also eliminating errors due to manual process of tax collection.[51]

Before the establishment of the Service Portal most of the operations relating to taxation were done manually with a lot of paper work involved. One major contribution of the service to tax administration in Nigeria is Automation. The operations of the Service are fully automated. All the processes can now be done electronically on-line on the FIRS Portal. The incident of human interaction has been reduced drastically.

Issuance of Taxpayer Identification Number (TIN) under S. 8(q) of the FIRS Act mandates the Service to issue Taxpayers Identification Number to every taxable person in Nigeria in collaboration with State Boards and Local Government Councils. By this the database of the Service is being developed for monitoring of compliance. TIN is one major innovation that has propelled voluntary compliance with taxation in Nigeria. It is now mandatory to have TIN for every Public Procurement and business transaction in Nigeria.

Furthermore, TIN, is a mandatory requirement of E-payment for all transactions with the Banks effective from 1st February, 2008.

Issuance of FIRS Tax Card (E-Card), which is a special debit card, enables the payment of FIRS Taxes. Banks have also been designated and authorized to transact business with Taxpayers with the E-Card.

The development of the FIRS database and integrated linkages with other relevant stakeholders in the financial sector has not only helped in proper monitoring but has also improved compliance and widened the tax net.

5.       Technology Solution to E-Commerce taxation

State leaders believe that a technology solution can be found to make the tax system more balanced and fair. The key provision of this proposal centers on using tax software to calculate and charge sales taxes from around the country and hiring third-party vendors to make the system work[52]. States would rely on tax software that could calculate all the different state and local tax rates.

Once the software is in place, the governors would make banks and credit-card companies responsible for collecting the taxes. Banks and credit-card companies would become third-party service providers that would embed the tax collection software into the Web sites of dotcom vendors. Whenever a transaction occurs, the third-party provider would automatically calculate the sales tax, charge the sales tax to the consumer, and send the revenue to the correct tax jurisdiction. The states would pay to have the system set up by charging a small fee for each transaction. The system is completely voluntary and any jurisdiction, as well as any vendor, could choose whether to participate or not. Supposing a person purchases through the web of a country that does not subscribe to participate

One then wonders how this will work or be implemented. There are some major problems with this proposal. First, getting all of the state and local tax jurisdictions to agree to a more unified tax system is a daunting challenge. Local jurisdictions rely heavily on sales taxes to fund all types of civic projects and they may be reluctant to give up control over tax rates and tax collection procedures. Another problem centers on the use of third-party vendors to calculate, collect, and distribute the taxes. Will such third party vendors not seek to be paid like tax consultants. Internet commerce is here to stay, and a solution or solutions will have to be found to deal with it. It is in the interest of the states to come up with a viable plan, otherwise, Legislators and the courts will take over the issue and make decisions that states might not appreciate or deem to be in their best interest.

a).      Pro Tax / Tax Fairness Position

State and local governments as well as a coalition of brick-and-mortar and Main Street business groups support the pro-tax/e-fairness position. Organizations such as the National Governors Association and the National Retail Federation support finding ways to collect sales taxes or at least make it fair for brick-and-mortar merchants to compete successfully with their dotcom counterparts.[53] Two important issues make up the pro-tax or tax fairness position. The first issue centers on a fundamental constitutional right guaranteed by the U.S. Constitution and the constitutions of other nations. State governments have the right to collect tax revenues. The second issue is tax fairness for both cyber businesses and brick-and-mortar establishments. It is safe to say that the issue of Internet taxation will generate a great deal of passion and interest, and that any solution or recommendation will not make anyone really happy or satisfied.

b).     State Revenues

In the United States of America, state governments derive their revenues from a variety of sources – property taxes, corporate income taxes, individual income taxes, and sales and gross receipts taxes. Of this mix of tax options, sales and use taxes account for some 48 percent of state revenues. Consumers who make purchases from out of state are also required, though few do, to pay a use tax. The states have, until now, failed to pursue the collection of these legal tax revenues aggressively. Some states are finally realizing just how important the use of taxes is to state revenues.

According to a study conducted by Forrester Research in the United States of America, state and local governments lost more than $525 million in sales taxes in 1999 because of consumer purchase over the Internet[54]. The study reports that $13 billion in taxable goods was sold online in 1999, but only 20 percent of that commerce was taxed.[55] Sales and use taxes are charged to the consumer, but it’s the merchant who is required to collect the tax and send it to the consumer’s state. This works when the consumer is located in the same state as the vendor or merchant. The merchant collects the sales tax and remits it to the state tax authorities. However, this scenario changes when a consumer purchases something from an out-of-state merchant or vendor – like in the case of mail order or Internet vendors. The merchant is required to collect the use tax and send it to the consumer’s state, but only if the merchant has a “physical presence” or “nexus” in the consumer’s state. A physical presence can be a store, a distribution centre, or a sales force. States therefore, cannot require remote sellers without a physical presence to collect sales tax on sales that occur in that state. Consumers are required to remit the use tax to the appropriate state, but most consumers rarely do.

The bottom line for state vendors is that sales and use taxes are used to pay for schools, police, hospitals, road and social services. Not surprisingly, state government leaders are less than pleased with these developments.

c).   The Nigerian Position

The Right to Tax

It is given that few Nigerians like taxes. To dredge up an old cliché, the fountainhead of Nigerian political culture rests on the phrase “no taxation without representation”[56]. Although Nigerians are tax allergic[57], taxes do serve a useful purpose. They provide revenues for federal, state, and local governments to support services, infrastructure, and resources for the public good. And the states have a right to levy and collect taxes on goods and services sold within the state. The only security against the abuse of this power is found in the structure of the government itself. In imposing a tax the legislature acts upon its constituents. This is in general a sufficient security against erroneous and oppressive taxation.

The leaders of the pro-tax/e-fairness coalition passionately believe that taxation of Internet sales falls within the jurisdiction of states’ constitutional rights. Furthermore, they believe that the federal government does not have the constitutional authority to ban taxation of Internet sales. The Supreme Court may weigh in on this issue if the legislature moves to exempt state taxation of Internet sales.

In Nigeria, what is generally known as sales tax in other jurisdictions is referred to as the value added tax. There is usually no controversy as to what rate of tax should be charged in Nigeria as the rate of value added tax[58] is 5% nationwide. The provision of Section 4 of the VAT Act reads thus

“The tax shall be computed at the rate of 5% on the value of all taxable goods and services as determined under sections 5 and 6 of this Act.”

It must be noted that the said sections 5 and 6 the VAT Act provide for the taxable goods and services while section 8 of the same Act provides for the body charged with the Administration of Tax.  Where the transaction is across borders of Nigeria via internet, the difficulty could arise as to which jurisdiction should collect such tax. For example where a person in Nigeria purchases goods on the internet from a company in London both the Nigeria and the British Government may in the absence of treaties be interested in charging tax. This could cause untold hardship of double taxation on a tax payer.

Thus, the issuance of TIN would help stem the tide of lack of proper identification of taxpayers, tax evasion, tax shopping and ensure voluntary compliance. The State Boards and Local Government tax revenue bodies are enjoined to follow suit.

Electronic Tax Clearance Certificate (e-T.C.C.) should be used as a ticket for all forms of transactions with government agencies, Banks, and Schools. This strategy is explained by the Lagos State Government in the following passage-

The Lagos State Government has made it compulsory for business owners, workers, in both private and public sector, traders and Artisans, to produce the newly introduced Electronic Tax clearance Certificate (e-T.C.C.) as a means of identification in all transactions with the State[59].

This is an effective way of locating taxpayers. It is also emphasized that the tax authorities should cooperate with other collaborating agencies like Corporate Affairs Commission, EFCC etc. so as to obtain the names and addresses of taxable businesses registered by the commission for purposes of taxation.

d).     The Anti-Tax Position

Many federal, state, and business leaders support the ban on Internet taxation. The anti-tax position addresses three issues:

Few leaders, whether supporting taxation of Internet sales or not, would dispute the importance the Internet has begun to play and promises to play in the future growth of domestic and world economies. The unprecedented growth in the Nigerian economy is due in part to the explosive growth in large and small dotcom companies. No one doubts that the Internet is here to stay and will continue to generate billions if not trillions of dollars in sales, profits, and revenues. The anti-tax crowd would like to continue to make it as easy as possible for Internet companies to grow, to hire more and more people, and to continue to tap into the entrepreneurial creativity unleashed by keeping it easy to set up a virtual business.

Anti-tax business and government leaders fear that taxation of Internet sales would not only threaten e-commerce, but choke off the growth of the e-commerce engine and have serious economic consequences for the economy. Christopher Cox[60] has argued in an editorial that the pro-tax coalition has not taken into account the fact that the Internet has opened up new markets for Main Street businesses, generated new jobs and high-paying wages, and built a stronger economy — all of which contributes to state tax receipts. The anti-tax group argues that rather than trying to find ways to tax Internet sales, states should find ways to make it easier for dotcoms to prosper.

Furthermore, the anti-tax crowd dispute the argument that state and local governments will be severely hampered if sales taxes from Internet sales cannot be collected. Aaron Lilly of Citizens for a Sound Economy[61] argues that state revenues will not be adversely affected. He reports that the lost tax revenue amounts to “not quite one-tenth of 1 percent of state and local government sales and use tax collections.” He added in support of his argument, that state governments are experiencing tax revenue surpluses that challenge the opposition’s argument that states and local government will lack the revenues to pay for schools, police, roads, and other support services. He advised further that state government leaders need to plan for a rainy day, when the economy declines, and state coffers have no surplus to fall back on (assuming rainy-day planning is what leadership is all about).

e).      Current Tax System

       The tax burden from multiple tax jurisdictions could be very costly. Taxation of online transactions “would require the vendor to identify all relevant taxing jurisdictions, calculate how much to charge, file forms, and remit payments to hundreds or even thousands of different taxing authorities.” Trying to establish a tax system that takes into account the different jurisdictions, tax rates, the different product definitions, and which products are subject to taxation is a great challenge that could significantly impair the ability of large and small dotcoms to make money or even to operate.

6.       Conclusion

It is unlikely that the issue of Internet taxation will have been resolved by the time you read this article. Furthermore, the Nigerian public believes that fairness for both online business and brick-and –mortar businesses should be found. Streamlining State sales and use taxes seems to be like a good idea, but with so many tax jurisdictions, as it is in the United States, this would seem to require a voluntary agreement to change to a single tax rate nationwide but this is as likely to happen as national healthcare reform in some countries.

National Assembly, State Government leaders, and the President need to deal with some tough question and to offer thoughtful ways of addressing the nexus/physical presence issue. Without resolving this issue, no meaningful change can be made without costly litigation and delay.

Why should information professionals, librarians, and independent researchers care about internet taxation? There are several reasons: we are members of a growing and increasingly important segment of the internet and information economies. Information means money, a lot of money, and you can bet that this fact has not gone unnoticed by state political leaders.

How many of us use the internet to conduct business? Probably all of us. We do research on the Net, we buy and sell our services and expertise on the net, we conduct business with other information vendors over internet, and that is precisely why we need to pay attention. Business –to –business commerce on the net is growing, and state political leaders will try to find creative ways to tax business-to-business e-commerce and I-commerce (Information commerce). We fall into this category and can be taxed.

What could be subject to taxation? They are listed as follows;

1.                 Literature searches.

2.                 Patent research.

3.                 Document retrieval.

4.                 Marketing research.

5.                 Web site design and maintenance.

Think about it, how could Internet taxation affect your business operation? We need to pay attention, decide how we feel about the issue, and instruct our legislative lobbyists to represent our views before federal, state, and local political leaders.

So, what is the solution? Clearly, minimal efforts by the states to educate buyers about their tax obligations are not working well. Certainly, a lot of revenue is at stake and this is not new tax revenue. The sales tax model doesn’t work well in an e-commerce environment, yet it yields about 1/3 of state revenues so it isn’t easily replaceable.

Internet commerce is here to stay and a solution or solutions will have to be found to deal with it. It is in the interest of the states to come up with a viable plan, to prevent Congress and the Federal Courts from taking over the issue by making decisions that states might not appreciate or deem to be in their best interest.

As solution to address the lost revenue better efforts to collect tax from consumers should be made. States could provide a table for computing the tax to avoid the need to keep records. Better educational efforts should also help, such as states running online advertisements that inform people that their remote purchase is taxable.

The Nigerian model of charging 5% VAT on certain goods will to a large extent, solve the problem of what should be remitted to states of the Federation.

[1] www.Usa-use tax-e-commerce. Last visited 5th January, 2011

[2] Ibid

[3] Ibid

[4]www.economic confidential.com/….18-how-we-generate-N808b-in tax-revenue-within-six months

[5] Dayo Ogunyemi, Attorney and Consultant (CAG/EMC Matrix) Legal Framework for E-commerce in

Ecowas, Accra, 29th January, 2005

[6] http//www.boe.ca.gov/members/dandal/eleccomm/marchissue.htm

[7] Arogundade J.A., Nigerian Income Tax & Its International Dimension Spectrum Books Ltd., Ibadan,

2005, P. 54


[9] Arogundade J.A., Ibid

[10] ibid

[11] The Economist of January 20, 2000, p. 10


[13] An Article “No Hiding Place for Tax Evaders with ICT Regime” by Iheanyi Nwachukwu cited in

Arogundade, Ibid, p. 54

[14] Thisday, Monday 29 June, 2009, p. 29

[15] Arogundade J.A, Ibid, Pp. 55-56

[16] Abdulrazaq M.T, “Tax Treatment of year 2000 Software Conversion Costs” an Article published in

Modern Practice Journal of Finance & Investment Law Nig. & International MP JFIL Vol. 4 No. 1 Jan,

2000, p. 11

[17]Ibid, p. 14

[18]Braithwaite v. and Braithwaite J., An Evolving Compliance Model for Tax Enforcement; Oxford University Press, New York. 2001. p. 2

[19] Amoman T. in a paper titled “FIRS in Anti money Laundering Regime. The Journey So Far”  presented at the FIRS England Management Meeting held on May, 2006, p. 2

[20] Daily Trust Newspaper of Tuesday Aug. 4th 2008 @ p. 10 reports that over N100 million was generated       through the sale of Scratch Cards to Applicants in Police Recruitment Exercise.

[21] Braithwaite v. and Braithwaite J., Ibid., p. 2

[22] Neil Brooks in a paper titled Key Issues in income Tax: “Challenges of Tax Administration and Compliance; delivered at the Bank Tax Conference; Asia, 2001

[23] Ibid

[24] Guage a quarterly publication of FIRS, June 2008, Backpage, p. 10

[25] Section 40 of the FIRS Act

[26] Section 81 & 82 of CITA imposes same obligation in withholding WHT at source on Ministries,

Departments and Agencies, Section 81 of PITA imposes the obligation on employers to deduct income

tax of employees under the PAYE Scheme.

[27] (i.e. Section 24 of the FIRS Act allows the Accountant General of the Federation to deduct from

budgetary allocation taxes due from MDAs, Section 55 (4) (a) & (b) of CITA)

[28] In a paper titled Project Fact, the journey so far, presented by Oduba O., (FIRS Project Consultant) at the

Project Fact Training organized by FIRS at Aptech Computer Institute, Abuja 4th-18th July, 2008, p. 1

[29] Ibid

[30] Ibid

[31] Guage a Quarterly Publication of FIRS April – June, 2009, p. 37

[32] Ibid, p. 37

[33] Communiqué issued at the end of the 120th Meeting of JTB held from 1-4th March, 2009 at Giyinya

Hotel, Sokoto, Sokoto State.

[34]Williams D.W (Op.Cit) at 203


[36] Obayemi. O “The Legality of Lagos Sales Tax”.(This day September 20,2005)  pp 43 and 45 and July

13, 2005

[37] (1985) 1 NSCC p.487

[38] Ikwazom, C;  “What manner of sales Tax?” (This day September 13, 2005 p.41)

[39] See Scott Mackey, “The Other Face of E-commerce: Can the Sales Tax survive Cyberspace?

(Government Finance Review, 2000) P. 27

[40] Nigerian Tax Reform in 2003 and Beyond, Op. Cit., p. 299

[41] The Nation, Tuesday Sept. 6, 2011 p.3

[42]Nigerian Tax Reform, Ibid., p. 299

[43] At a Workshop held on 4th December, 2008 in Minna aimed at educating tax payers on the new products    from FIRS in the Daily Trust Friday Dec., 5, 2008 P. 10

[44]Akpo U., in a paper titled “Ensuring an effective personal Income Tax Administration, approaches and    challenges” (2006) delivered at the FIRS Enlarged Management Meeting held on January, 2006, pp. 4-5

[45] Ibid

[46] “Guage” a Quarterly publication of the FIRS, October-December, 2008, p. 40

[47]Olusegun Obasanjo was the civilian President of Nigeria from 1999-2007

[48] The Guardian of Tuesday January 27, 2009, Back Page

[49] Ibid.

[50] Daily Sun Friday September 9, 2011, page 3.

[51] Ibid

[52] UNDP Human Development Report 1999

[53] National Governors Association Online, Overview of Sales and Use Taxes and Electronic Commerce.

Quick Facts ( http:// www.nga.org/internet/overview.asp)

[54]Internet Taxation published by Duke University

[55] Ibid

[56] It will be recalled that the Aba Women’s riot of 1929 was occasioned by the fact that women were asked    to pay Tax.

[57] Ibid

[58] Section 4 of the Value Added Tax Act Cap V1 Laws of the Federation of Nigeria, 2004.

[59]Financial Standard (March 15, 2004) visit www.lasg-ebs-rcm.com

[60] Christopher Cox. “Internet Tax Freedom at One: No Net Taxes, More Sales Tax Revenue” (http://cox.house.gov/press/columns/1999/Internettaxs.htm ).

[61] Aaron Lilly “ No Internet tax: Why Internet Sales Taxes Aren’t Necessary” (http://www.cse.org/informed/540.html )
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