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There’s no escaping it. Within the next five years, all businesses will become e-businesses. They will recruit employees online. They will handle HR functions online. They will deal with suppliers and vendors online. They may do their accounting and record keeping on a web site, and they surely will interact with customers online. Because an e-commerce business model is radically different from the traditional “brick and mortar” models on which existing tax rules are based, tax planning for e-businesses is especially complicated. Employing a holistic approach to tax issues has proven to be the most successful approach. WHAT GETS TAXED? To understand the strange new world of e-commerce taxation, consider the case of a high tech company evolving into an e-business. This company, Good Vibes Inc., has historically developed and sold software applications for use in businesses that create recordings, videos, tapes, etc. At one point, Good Vibes Inc. sees that its clients can carry out their production activities faster if they perform their production and editing functions on a central web site. To capitalize on this opportunity, Good Vibes decides to stop selling its software and start putting production and editing tools on its web site, allowing customers to use the software, real-time, while they are online. As an added service, Good Vibes lets more than one customer from more than one location use the software to work on the same project at the same time. Of course, Good Vibes changes its name to eVibes.com. Interesting business, but how is it taxed? Given the customers and locations involved, it is difficult to determine the exact nature of the transaction — or transactions. Are customers buying a product? Are they paying for a service? Are they simply renting time on a piece of equipment? If they are renting, who has jurisdiction over the equipment, the locality where the server is located or the locality where the company has its headquarters? These and other questions make tax planning for this and other electronic businesses extremely complex. RULES ARE CHANGING The gray areas of e-business transactions can be a great source of concern for tax planners. In the brick-and-mortar world, taxes are based primarily on what the company collects in revenue, what it owns in assets and where its employees are located. The “own a building, make a sale, pay a tax” approach works because, at their root, all taxes are a function of value. Assessments of value produce “direct” taxes — which are based on a firm’s legal structure, operations or assets — and “indirect” taxes, which are based on a company’s transactions. In the e-commerce world, however, direct and indirect taxes are more difficult to determine. As the example of eVibes.com illustrates, the source of value is often elusive and the exact nature of a business transaction can be open to debate. Views on Internet taxation vary from jurisdiction to jurisdiction and, despite ongoing national and international negotiations, there is no uniform set of e-business tax rules. Unfortunately for tax planners, e-business is rapidly moving forward while the tax rules governing e-business are lagging far behind. Faced with uncertainty, successful e-businesses have found that the best way to stay on track is to employ a holistic approach to tax issues. GAINING A COMPETITIVE ADVANTAGE How should you implement a holistic tax plan for your e-business clients? You should start by thinking of taxes as a way to gain competitive advantage. In the fast-moving world of e-commerce, companies that are informed about changing tax laws and opportunities — and who are able to adapt to those opportunities — come out on top. To gain an advantage, stop thinking of taxes as an area of compliance, and start thinking about taxes as a means to move your client’s business forward. Once this mindset has been established, consider the many ways that taxes will influence your client’s new e-business model. Ask yourself some key questions: How does the business define, distribute and price its products or services? How much of the value of its product or service is brand driven (intangible) and how much is directly attributable to manufacturing processes or physical content (tangible)? Does the company have direct employees or does it work through vendors and contract workers? By evaluating the potential tax aspects related to these and other crucial characteristics of your client’s business, you can boost efficiency and save the company money. Next, take a long look at world markets and the activities that may affect tax liability. The e-business world may appear borderless, but companies must be mindful of the peculiarities of the various jurisdictions in which they do business. Determine your “footprint,” that is, where your client’s company is physically located and/or electronically doing business. Just as in the case of eVibes.com, where your client’s company locates and where transactions take place can make all the difference at tax time. KEY ISSUES Ultimately, any tax strategy is about efficiency. Making sure that your client’s company is making the most of its e-commerce opportunities means making sure that your client’s company is not paying more than it should in taxes. To ensure the efficiency of your enterprise, here are some key points to keep in mind: � Don’t develop e-business strategies or devise your client’s organization’s structure without considering tax implications. This way, your client’s company can avoid serious exposure and costly restructuring. � Pay attention to your client’s tax “footprint.” Make sure that your client’s company doesn’t move people, processes or physical assets without thinking of the tax ramifications. Know where costs and income come from and who gets what, where and when. � Be aware of new business drivers. What are the truly important components of your client’s business, and how are they taxed? Enter into negotiations with an eye toward tax savings. Make sure that your client looks for tax relief or indemnification when entering into agreements with partners, vendors and municipalities. � Make sure that your client gets involved in the formulation of tax policies in its primary jurisdictions and takes part in shaping the tax laws that affect its business. � Make sure that your client invests in its infrastructure. Stay on top of advances in technology and systems that will keep your client’s business competitive, and know the tax implications of making infrastructure investments. Although the electronic marketplace is large and ever changing, your client’s e-business has the opportunity to prosper though intelligent tax planning. But using tax strategy effectively means making it an integral part of a company’s overall business model. Keep in mind that tax does not stand alone; there is a direct link between the success of an enterprise and the care that goes into tax matters. Use this knowledge to create a holistic tax strategy that will keep your client’s e-business competitive no matter how much the electronic marketplace grows and changes. Joseph Tierney is a partner at PricewaterhouseCoopersin Boston. A version of this article first appeared in Mass High Tech in Boston.

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