E-commerce Leads To Tax Conflicts Among Brazilian States

It is undeniable that the Internet has altered several social and commercial relationships and created realities that are not satisfactorily regulated by the law.

There is a clear gap between the technological advances and the rules governing the judicial framework for the new forms of interacting and doing business on the web. In tax law, that gap is even larger, because the tax levy rules are strongly linked to rigid concepts which are often inconsistent with the dynamics of the virtual environment.

A case illustrative of that conflicting relationship between taxation and the Internet is the recent debate on the sharing of the Brazilian State VAT tax (ICMS) levied on interstate e-commerce. Many states of the Federation have established tax barriers to goods that consumers residing in those states acquire from virtual stores with distribution centers located in other states. In this context, the ICMS in question is assessed at the time the goods enter the end consumer's state of residence. In most states that have implemented that kind of measure, the tax rate is 10% of the transaction amount. This rate corresponds to the difference between the interstate ICMS rate, which varies from 7% to 12%, and the internal rate in the state of destination, which in most cases is 17%

The main activity conducted by virtual stores is nothing but a form of commercial purchase and sale, wherein the purchaser acquires a certain good offered on the Internet at a site maintained by the seller, that is liable for the delivery. Although the sale has been made on the Internet, the virtual store uses the physical premises of an establishment, as a rule, a distribution center, from which the good is shipped to the purchaser. As a rule, purchasers of goods from virtual stores are individuals, therefore, persons that do not pay ICMS. As a result of the nature of the addressee, most of the interstate transactions with goods negotiated on the Internet are subject to ICMS taxation only in the state where the shipper's establishment is located, that is, the virtual store's distribution center. This is so because under article 155, paragraph 2, item VII, letter 'b' of the Federal Constitution, interstate transactions in which the addressee is an end consumer that does not pay ICMS are subject to the internal tax rate of the state where the distribution center is located, regardless of the location of the headquarters of the virtual store.

Although it is not difficult to...