_________________________________________________________________ Centura _________________________________________________________________ INTERNET BEWARE: GOVERNMENTS ARE SMELLING A RICH NEW SOURCE OF TAXES __________________________________________________________________________ Copyright © 1996 Nando.net Copyright © 1996 The Boston Globe

(Sep 25, 1996 8:06 p.m. EDT) If taxes are the price we pay for civilization, the Internet is about to become a lot more civilized. State and local governments are coming to see on-line computer networks as a rich, new revenue source, and they want to cash in.

An official of the Massachusetts Department of Revenue said this month on-line service providers that do business in the state should be paying a 5 percent sales tax. Those who haven't been paying could face audits, penalties and demands for back taxes.

The state of Tennessee has demanded on-line services doing business there turn over their tax records and a count of how many customers they have in the state. Cities in Texas and Colorado are considering special on-line taxes. And a recent effort to slap a 6 percent tax on Internet users in Tacoma, Wash., aroused so much public outrage that city officials were forced to back off.

Many Internet experts agree that Internet taxes are inevitable. After all, connecting computers to the Internet is now a $2 billion business, and people use these networks to buy and sell millions of dollars in goods and services.

[...]

But some also fear the chaos that could result as 50 state governments and thousands of cities and counties each make their own rules about taxing computer networks and the transactions that occur on them.

The issue may be given new prominence, thanks to a surprising decision by a major Internet service provider. In late August, Netcom On-Line Communication Services Inc. began notifying its Massachusetts customers the company would start adding the state's 5 percent sales tax to its bills. Netcom typically charges $19.95 a month for a personal Internet account, so the tax would amount to $1. Similar notices were sent to Netcom customers in several other states, including Illinois and Pennsylvania.

Did the taxing authorities in these states demand their money? Guess again. Netcom has decided to begin paying the taxes voluntarily. Thomas Weatherford, Netcom's chief financial officer, said its accounting firm, Ernst & Young, warned them early this year that Netcom might be liable for the taxes.

[...]

So Netcom contacted state tax officials for clarification. Netcom's 500,000 customers are scattered throughout the United States, but the company is focusing on tax laws in Massachusetts and 14 other states where most of its customers dwell. Weatherford said he still had received no official word from Massachusetts, but Netcom attorneys had concluded the company is subject to the state's telecommunication sales tax. To play it safe, it will begin collecting the tax this month.

Remind me not to sign up with Netcom.

It's probably a smart move. At the Massachusetts Department of Revenue, acting general counsel William Hazel told the Globe that Netcom and every other on-line service provider should be paying the sales tax.

"To the extent that folks are being charged for the ability to telecommunicate through the Internet... that's taxable," he said.

This situation could change. The state has set up a legislative commission to review its telecommunications tax policy, with a final report due next year. But for now, Hazel said, Massachusetts wants its money, including back taxes from up to seven years ago. Hazel said some Internet access providers are paying the tax already.

But plenty of others are not. For example, Kristopher Hill, president of NetWorx Internet Services Inc. in Newburyport, said he believed his firm didn't have to pay sales tax in any of the dozen states in which it operates. He wasn't thrilled to hear that he may be wrong. "If we have to start dealing with Chicago tax law, that'll be a major pain in my butt," he said. Chicago imposes a tax on telecommunications services over and above the Illinois state tax.

Hill is even more annoyed by the prospect of being ordered to pay years of back sales taxes in Massachusetts. He said state officials never told Internet service providers they were liable for the money, and to try to collect it now would be unfair. "We would sooner leave the commonwealth than be subjected to seemingly arbitrary and ill-defined taxes," Hill said.

[...]

Netcom's Weatherford opposes taxes on Internet services but says if his company pays voluntarily, tax officials should demand payment from Netcom's competitors. That could mean trouble for America's 3,700 Internet service providers, many of which are shoestring operations that will have to set up tax collection procedures.

Translation: Netcom is attempting to use regulations to shut down its competitors.

The fuss over Internet service taxes is just the beginning. Another sticky controversy awaits: How do you tax sales of goods and services over the Internet?

[...]

And then there's the question of which government is entitled to collect the tax. Say you log on to Ohio-based CompuServe, where you buy a fruit basket from a firm in California and have it sent to your mother in Chicago. Which state gets to collect tax on the transaction? The experts say right now, the answer is unclear.

If they think that's "unclear", wait until they start dealing with multinational transactions....

But tax-hungry governments are hard at work trying to figure it all out. According to KPMG Peat Marwick, sales of goods and services over the Internet will reach $125 billion by the year 2000. One way or another, governments intend to get their share.

Note the typical biased phrasing. [...]

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