¹See Williamson, Naveed and Nakamoto, Sourcing Income from Internet Transactions, 34 The Tax Adviser 206 (April 2003).

²If such U.S.-source income is fixed or determinable, annual or periodic and not effectively connected to a U.S. trade or business, Secs. 871(a) and 881(a) tax it at a flat rate of 30%, subject to reduction by treaty.

³See U.S. Model Income Tax Convention, Article 7 (9/20/96); Organisation for Economic Cooperation and Development (OECD) Model Tax Convention on Income and on Capital, Article 7 (6/30/98).

⁴See U.S. Model Income Tax Convention, Article 5 (9/20/96); OECD Model Tax Convention on Income and on Capital, Article 5 (6/30/98).

⁵See Sec. 864(b) for rules on the performance of personal services constituting a U.S. trade or business.

⁶Inez de Amodio, 34 TC 894 (1960), affd, 299 F2d 623 (3d Cir. 1962).

⁷Piedras Negras Broadcasting Co., 43 BTA 297 (1941), affd, 127 F2d 260 (5th Cir. 1942), nonacq., 1941-1 CB 18. 

⁸See U.S. Treasury Department, Discussion Paper, Selected Tax Policy Implications of Global Electronic Commerce, Sec. III, 7.2.1.1 (11/21/96).

⁹Regs. Sec. 1.864-7(d)(3)(i) states that an independent agent means a general commission agent, broker or other agent of an independent status acting in the ordinary course of his business in that capacity.

¹⁰A related party can be an independent agent. Regs. Sec. 1.864-7(d)(3)(i) states, [t]he determination of whether an agent is an independent agentshall be made without regard to facts indicating that either the agent or the principal own or control directly or indirectly both. For example, a wholly owned domestic subsidiary corporation of a foreign corporation which acts as an agent for the foreign parent corporation may be treated as acting in the capacity of independent agent for the foreign parent corporation.

¹¹Regs. Sec. 1.864-7(b)(1) provides ...for this purpose, an office or other fixed place of business shall include, but shall not be limited to, a factory; a store or other sales outlet; a workshop; or a mine, quarry, or other place of extraction of natural resources. A fixed facility may be considered an office or other fixed place of business whether or not the facility is continuously used by a nonresident alien individual or foreign corporation.

¹²Although the foreign persons sporadic or infrequent use of a U.S. ISP would not result in income effectively connected with a U.S. trade or business under Regs. Sec. 1.864-7(b)(2), this exception does not appear applicable to businesses conducted substantially over the Internet.

¹³Alternatively, an agent of a foreign person would constitute a U.S. fixed place of business if the agent carries a stock of merchandise belonging to the foreign person from which it regularly fills orders on the foreign persons behalf. However, it is simply impractical for an ISP to carry nondigitized goods for customers.

¹⁴See Clarification on the Application of the Permanent Establishment Definition in E-Commerce: Changes to the OECD Commentary on the Model Tax Convention on Article 5 (12/22/00).

¹⁵Id., at Sections 42.2 and 42.3.

¹⁶Id., at Sections 42.5 and 42.6.

¹⁷Id., at Section 42.4.

¹⁸Id., at Section 42.7.

¹⁹Id., at Sections 42.742.9.

²⁰See Taisei Fire and Marine Insurance Co., Ltd.,104 TC 535 (1995), acq., 1995-2 CB 1.