The advent of the Internet has apparently become an indispensable aspect of modern commercial transactions. The major reason for this is that Internet brought what we call it now e-commerce. Generally speaking, E-commerce is undertaking of business activities through the Internet, fully or partly. However, the path of e-commerce is not all the way easy. Along with it, there are a bundle of issues. One of such issue is the taxation of e-commerce. The thing here is that, the conventional tax principles, laws and institutions dwell on the principle of physical locations and In other words, they have in mind the principles of territoriality or geographical attachment. On the other hand, ecommerce can be undertaken in a virtual space where the principles related to geography, physical location and territoriality have no or little value. In Ethiopia, e-commerce being backed by different government policies and strategies is growing. Sources on the area indicate that e-commerce is growing with 31% per year with a capacity of generating huge money significant for tax. However, whether the legal and institutional framework related to tax really applies in the context of ecommerce has not been evaluated. Therefore, this theme is the main thrust of this paper. Therefore, the purpose of this thesis is to identify and examine the challenges of taxation of e-commerce in Ethiopia. Scope wise, it only deals with income tax, VAT, and tax administration associated with the two. As far as the methodology is concerned, the research adopts qualitative legal research methods. To this effect, analysis of Ethiopian income tax, VAT and tax administration Laws, relevant literature as well as comparative experiences of OECD and EU have been consulted. Moreover, with a view to identify issues concerning to the institutional framework, primary data were collected through interview with experts from MOFEC, MOT, ERCA, Ethio-telecom, MCIT, Bahir Dar University and Addis Ababa University. As it stands now, the current tax system that comprises of legal and institutional framework seem to have a pitfall concerning taxation of e-commerce. The paper has revealed that there is no clear and comprehensive legal framework that adequately and meaningfully addresses the issues of taxation of e-commerce. Moreover, findings of the research also unveiled that the current tax framework in Ethiopia is not crafted taking e-commerce into account. The other finding is that that e-commerce is growing in the country and the revenue it generates is also significant to tax purpose thereby the taxation of e-commerce in Ethiopia is an issue to worry about. In relation to the institutional framework, the findings of the research demonstrated that, there is absence of readiness on the side of the tax administrator to properly administer taxation of ecommerce. This is evidenced from the lack of awareness, lack of skilled human power and lack of necessary technological platform to identify whether transaction undertakes and the identity of the parties in the transaction together with the extent of the transactions. Hence, based on the above findings, the writer recommends that the government should undertake a tax reform centering ecommerce which includes the amendment of existing tax laws from e-commerce view point. In this regard, the government needs to take OECD’s and EU experiences. It should also enhance the institutional framework to tax e-commerce. The government should also formulate a tax policy on ecommerce. It is also suggested that the government need to put the necessary technology in place and create awareness regarding the essence and administration of e-commerce. Key Words: Challenges, Digital Products, E-commerce, Ethiopia, Tax, Income tax, VAT, Institutional framework, Tax Administration.