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Kiss Your Taxless Net Goodbye

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ve, adding a line on tax forms and asking you to pay up is laughable.

And yes, it probably won't net much.

But you know what? It's the beginning of a tax tidal wave on the Net.

Some of you, no doubt, are scratching your heads and saying, "Hey, I thought the Internet was tax free?!"

Wrong, bucko. Sure, in 1998 Congress passed the "Internet Tax Freedom Act." And it's currently discussing an extension. But that law only stops taxes on Internet access. Purchases made over the Net... those are fair game.

But collecting is hard, to date. State governments can't force out-of-state retailers to collect sales taxes (the Supreme Court said so after states tried to get catalog companies to collect sales taxes). So the only option is to persuade individuals to cough up what they owe after the fact. Not so easy.

But now states and local governments facing budget shortfalls really, really need the money. And Internet sales... that's serious money.

According to comScore Networks, online sales totaled $52 billion last year. Now, suppose those sales were hit with an average 6 percent sales tax. That'd be $3.12 billion. Divvy it between 50 states and you got $62 million apiece. A drop in the bucket, sure, but enough for a few school books or fire trucks or street signs.

Of course, tax rates and bases are different from state to state. And some online retailers, ones that also operate bricks and mortar stores, already collect sales tax. But you get the idea. It's not chump change.

"It's a lot of money that's not being collected and states are starting to do what they can to collect it," said Alysoun McLaughlin of the National Association of Counties.

The 19 (see table) states making the first stab are adding a line to their income tax returns asking tax payers to 'fess up to what they bought on the Net (or through a catalog, for that matter) and to pay the sales tax due. If you don't have the receipts handy, they'll just take a likely amount based on your income. (To find out more about the effort, click here).

Or you could just say "zero" on the line, which a lot of people will undoubtedly do (rightly or wrongly).

"Yes, a few people won't pay it, but you'll get some," said McLaughlin.

And something is better than nothing if you are a cash-strapped state. And other cash-strapped states, or even just budget-minded ones, will look at how much was collected this year and decide that they want a piece, too. My bet is that next year, those 19 states will have grown to at least 30, if not 40.

And guess what? As more states take to asking for sales tax, they are going to figure out ways to enforce collection... like auditing online retailers and rummaging through lists and databases and so on.

In fact, already there's the "Streamlined Sales Tax Project," a program in which states, with input from cities and counties, are coming up with a uniform system of applying and allocating sales taxes. If it comes to fruition -- 20 states are on board so far -- merchants will no longer be able to complain that collecting sales taxes is too hard (which is why the Supreme Court said they didn't have to collect them).

Will a sales tax offensive choke Internet commerce? Nah.

More bright ideas? Click

"We've found time and time again that sales taxes did not have a significant impact (on online sales decisions)," said Ken Cassar, director of strategic analysis with Nielsen Netratings. Things like brand and the base sales price are bigger concerns, Cassar said. "Sales tax is a smaller issue for consumers."

Indeed, at $52 billion worth of sales, you could say the Internet is now grown up and can afford to be put on more equal footing with the rest of the retail world.

But sales taxes won't be the end of it.

Internet telephony is likely to be a target. After all, regular phone calls are taxed... why not Internet calls?

And e-mail. Some folks, notably Microsoft's Bill Gates, are suggesting a type of tax or fee there may be the cure for spam.

And you know what? If the government needs to regulate the Internet more -- porn, scams and terrorism come to mind -- Congress will want a way to pay for it.

That ban on taxing Internet access? Hmmm...