Saturday, April 20, 2013
Assaf Y. Prussak (S.J.D. 2013, Michigan), The Income of the 21st Century: Online Advertising as a Case Study for the Implications of Technology for Source-Based Taxation (Winner, 2012 International Fiscal Association (USA Branch) Student Writing Competition):
Throughout history, traditional trade and commerce, whether by land, sea or air was always engaged in a very physical manner, thus subjecting it to constraints and barriers imposed by both natural and man-made borders and jurisdiction lines. The computer and Internet revolutions created a new medium for trade and commerce – the virtual market place. This unique platform for engaging in trade and commerce created new opportunities for generating value and profit in ways not available before. One of those Internet-based revenue-generators is online advertising. With growing availability of the Internet around the world, double-digit growth rate, and stronger-than-ever financial reports of the major players in this market (Google, Facebook and the like), online advertising is expected to be a key player in the twenty first century global economy. The unique characteristics of this new type of economic activity challenge the traditional boundaries of generating income from cross-border transactions, which for centuries have defined and limited the world of commerce. Online advertising is completely unbound by any physical or jurisdictional borders and it is generated in a multi-party transaction in which the active party which generates the revenue (the end-user who views the advertisement or acts upon it) is neither the payee nor the payor. When this type of activity takes place in a multi-jurisdiction context (whether at the international or state level), it gives rise to interesting questions regarding the tax implications of the income it generates. The source of this income, its character, its effect on the U.S. domestic tax system and its implication on the complex web of bilateral tax treaties, are only some of the issues which deserve a serious discussion. This paper will attempt to introduce the reader to the unique characteristics of income from online advertising and present some of the interesting tax implications it creates.