The Internet Throws Tax Man for a Loop States Are Exploring How to Tap Net Access Providers

By Laurent Belsie, writer of The Christian Science Monitor | The Christian Science Monitor, September 19, 1996 | Go to article overview
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The Internet Throws Tax Man for a Loop States Are Exploring How to Tap Net Access Providers


Laurent Belsie, writer of The Christian Science Monitor, The Christian Science Monitor


Benjamin Franklin once said taxes are one of life's certainties. But that was before the Internet. In the past year:

*California and New York have set up commissions to study the impact of cyberspace on taxes.

*Florida tried to tax companies offering Internet access but backed down after a storm of protest. A special Florida Internet commission is studying the issue. *Tacoma, Wash., made a name for itself by charging Internet access companies its standard 6 percent levy on telephone companies. Five months later, the city council voted to exempt them because it was bad for business. Cyberspace, it seems, is throwing the tax man for a loop. "Some people talk about taxing the Internet. But when you break that down what does it mean?" asks Scott Mackey, tax analyst with the National Conference of State Legislatures based in Denver. "The Internet is not just some thing out there you can tax. It's not a corporation. It's just a bunch of computers linked together." Part of the problem is that tax officials are trying to apply old standards to a new industry, which is always hard, tax experts point out. It's doubly difficult when the old rules are based on physical goods and physical space - concepts that the on-line world barely comprehends. For example: If a national Internet provider, such as Netcom, offers its service in a state but has no physical presence there beyond some local phone numbers, is it doing business there? Massachusetts thinks so. "It seems clear that the Internet access falls directly under our regulation," says Jeffrey Busha, spokesman for the Massachusetts Department of Revenue. The state has started charging a 5 percent tax on on-line service fees. "They're wrong," counters Martin Eisenstein, an expert on the issue and partner at Brann & Isaacson, based in Lewiston, Maine. He points to a landmark 1992 case in which the US Supreme Court ruled that states couldn't force an out-of-state catalog company to collect sales taxes if it didn't have a physical presence there. If that rule applies to catalogue companies, Mr. Eisenstein argues, it ought to hold for on-line companies too. Once states try to tax actual commerce over the Internet, the questions will get even trickier. Suppose a computer user in Nevada logs on to an Internet site in California to buy a product in Arizona. Which state gets to tax the sale?

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