Characterization of E-Commerce Income in the United States

The characterization of income is a key taxation element because it determines how income is sourced and taxed. The characterization of e-commerce income is complex because e-commerce allows for an increasing number of goods and services to be delivered online. Due to digitization, it is more difficult to determine whether income represents sales income, or services income, or whether an intangible product has been licensed, thereby giving rise to royalty income. The United States Internal Revenue Service (“IRS”) has issued regulations that contain detailed rules regarding the characterization of transactions involving software. However, the application of Subpart F of the U.S. Internal Revenue Code of 1986 to e-commerce for the characterization of income raises several questions.

The following questions have been addressed in this article:

What is Subpart F of the U.S. Internal Revenue Code of 1986, and how it is relevant to e-commerce?
What are the issues in applying Subpart F to e-commerce?
What are the regulations issued by the IRS regarding the characterization of transactions involving software?

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