Technology has impacted the incidence and manner in which taxation is imposed. The geographical foundations of existing taxing systems and non-territorial character of e-commerce is at heart of the challenge that e-commerce poses to taxation. The problems of buyer’s identification, difficulty of establishing location/residence and status of party to e-commerce transactions are substantive challenges for Ethiopian VAT in the era of e-commerce. Similarly, the inadequacy of the Ethiopian VAT Proclamation to define what constitutes a ‘permanent establishment’ for e-commerce purposes, the absence of guidelines on acceptable records where goods are delivered, invoices issued and payments made by electronic means, lack of proper and adequate resources within the Tax Authority to monitor e-commerce transactions are identified as major challenges of applying Ethiopian VAT on e-commerce transactions. The article argues that a clear provision as to what constitutes a permanent establishment for e-commerce purposes should be recognised, and a special scheme which would require foreign vendors involved in supplying electronic services to Ethiopian consumer to register should be established. Further, for the sake of effective administration and collection of VAT revenue from e-commerce transactions, the cooperation of the Tax Authority with various stakeholders is advised.