Offshore Hosting and Where is a sale

[levseltzer]

I have a new client who wants me to host him "offshore" because (his words): "A sale is consired concluded in the hosting country."

(I don't believe the client is selling anything illegal or problematic. Perhaps this is only a tax issue).

Is there any truth to his statement? If he hosts offshore, but then uses a US-based payment company (e.g. PayPal or 2Checkout) does this negate his having a site offshore?

What if I hosted him on Vortech servers (which is what I'd really like to do), but then used an "offshore" payment service to complete the sale? Would this work equally well?

Any advice would be most appreciated.

Lev

[dtay73]

This is something that would be best asked of an international lawyer. Things vary from country to country in the interpretation. Legal or not, things like this are still cheating the system and can come back to haunt you in the future.

[jetzkr8]

I do not think the location of the servers is an issue. The terms and conditions is very important. As far as tax issues are concerned it impacts both parties, the seller and the buyer. The seller is governed by the laws of his registered business. The buyer is also governed by the laws and taxes of his residence. That is why you will find that the TOS specifically state that the laws of so-and-so State, country will apply in the event of legal proceedings. Getting judgement in one contry is one matter, effecting that judgement on a citizen or entity of another country is a grey area.

Then comes the payment processor. The payment processor will state in their TOS which laws/country applies.

Therefore if I am from Malaysia and use PayPal while the customer is from the UK, then I am still governed by the IRS of Malaysia, while Paypal may levy VAT,GST etc that apply by law of their institution. The customer might also be subject to local taxes, which will be disclaimed in my TOS.

That's about how things go. Placing your servers in Timbaktu matters not, the IRS will still require the company to declare their income, whether they earn it in the US or Timbaktu, US taxes will still apply. The same way, the US laws would have no jurisdiction over me. I am free to take my money and am responsible to declare it in my country of registered office.

[levseltzer]

Thanks for the replies. I don't think this is a matter of "cheating". My client is from Spain, and his partner is (I believe) non-USA. Therefore, they seem to simply not want to get involved in US taxes and/or rules (but I could be wrong - I've only met the client via email, and have never even heard that there was a partner until yesterday - such is the way of business on the internet)

[jetzkr8]

Originally Posted by levseltzer

.....I don't think this is a matter of "cheating".........

None was inferred. It is the custom of businesses to work through the system and avoid having to pay unnecessarily high taxes. I have a cleint who is being taxed heavily due to income from rental of property and now is seeking to operate some trading business whereby their income is subject to different taxation policies.

[mresell]

Personally, it better be worth all that headache. Get a contract etc... Sounds like from your description you are going to have to buy hosting offshore. That's where things get confusing. What you pay for and what they pay for in 2 diff places vary. Your business, is
what matters if you are reselling...you are not offshore. If he wants to get hosting where he is located with a business there. Not saying there isn't room for legal interpretation, But if you are in US it shouldn't matter where your servers are....it is your business that is the legal entity...not the server. This would adversely affect you
if they stiff you...lotsof trouble to collect. That's why TOS should state where legal issues would be determined. Sounds like a lotof trouble. You shoud do everything you can to make the most of your taxes...lord knows they answer to no one, but themselves. I just don't think it will matter in this case and if they think it matters, you could be looking at a sticky situation.

[levseltzer]

Thanks for the advice. I've convinced the client to host at Vortech (through my reseller account). hopefully it will all work out.

[dpyers]

The "a sale concludes at the hosting location" thought is not entirely valid. It fact, if not in law it actually varies by product and the US states and government will get around the letter of the law for certain products.

An example is online sales of cigarettes from indian reservations in the US. In the past these were not hit with state taxes. You could buy a cartons of cigarettes that, with shipping, cost about 60% of the shelf price in retail stores. But this year the state governments passed legislation requiring credit card companies to report those sales to the states who will go after the purchasers directly.

Similar legislation directed at the cc companies is either in place or coming soon for online gamling from foreign locations. The state and US governments make the contention that the bet is made on the clients PC and recorded on the server - similar to a bookie operation where the bets are called into a central location.

So, while courts may argue, governments have found a way around by requiring certain types of reporting from other parties involved in the transaction and go after individual consumers rather than the better financed sellers. The cigarette legislation was the initial legislative model (IIRC, 45 states piloted it together) that you can expect to see extended to other products sold online to US consumers.

The legislative model here will most likely also surface in some of the recent moves to limit online porn by the US gov - if you can't stop the providers, tax consumers identified by the cc companies.

FWIW, some of the indian reservations have gone to out-of-country cc procesors (some are Canadian) who don't have a direct business presences in the US. Sounds good, but they tend to have to change cc processors every few weeks for reasons I don't know.

[hground]

Just my 2 cents worth. My understanding is that the sale is where you have a physical business presence. If your clients are located in another country then I would think that renting servers in the US is no different than someone paying a mailing service in the US to send out flyers for their business. You wouldn't consider the location of your mailing service to be the location of the sale.

I know that for tax puposes here in the US for sales of tangible items - the tax is based on where my business adress is - not where my store-front is hosted. The only thing that might come into play is if they are actually doing something that is illegal in the US ( which violates the TOS anyway ) - the US government would have access to Vortech for getting information on the client and shutting them down, ect.

Again - this is just my opinion.

hground

[dpyers]

They are not going after the business for business taxes. They are going after the consumer for any taxes not strictly designated as a sales tax in area they reside in. The taxes they are collecting are those typically regarded as "sin" taxes on tobacco products.

The law for online tobacco sales went into effect in 40 something states in the beginning of June. Expect to see something very similar applied to the online sales resulting from the recent legislation to loosen the inter-state shipment of some types of alcohol products. In the next session of the US Congress this model will be incorporated into the "War" on online porn legislation to attempt to tax the industry out of existence through levies on the consumer.

The US states have been steadily increasing pressure on the federal gov to retire the moratorium on state sales taxes for online sales. IMHO, sooner or later the moratorium will be dropped and the tax code changed. The cigarette legislation provides the model for reporting any type of taxable transaction - not just sin transactions.

Death and Taxes are the only certainties. If you're not done in by one method, they'll change the rules.