This article critically analyses the challenges e-commerce poses to the traditional source- and residence-based taxation systems. It presents an exploratory study of two fundamental taxation principles that apply to international transactions in general and, more specifically, to e-commerce: the choice of residence-based or source-based taxation in governing the tax treatment of both domestic income accruing to non-residents and foreign income accruing to residents; and use of permanent establishment (PE) status in instituting the economic nexus required to assert jurisdiction over tax business profits. It is argued that in the interpretation and application of the rules, a clear distinction should be made between conceptual and practical issues. While there may be overlap between them, distinct issues exist regarding the normative questions of how and where profits arising from e-commerce should best be taxed as a matter of principle, as well as how such taxes should be implemented. The formulary apportionment of income earned by e-commerce business based on an economically justifiable formula provides a viable solution.