Federal and state governments wrestle with cybertaxes.

• Author: Margaroli, Richard

The advent of the Internet, while opening up the world to enormous treasures, has also brought with it a multitude of unknowns. Federal and state governments have found this out firsthand, as they wrestle with how to tax transactions not only originating, but also culminating, on the Internet.

In the pre-Internet world, a service was taxed where it was rendered. But where is the transaction taxed if a consultant offers his services over the Internet? Is the transaction taxed where the information is posted to a Web page, where the information is downloaded from a Web page, or where the computer serving the Web page is located?

The answers to these questions, while currently unknown and in need of clarification and guidance, have both interstate and international tax ramifications. Indications from Treasury are that it would prefer to open such issues up for discussion rather than issue policy pronouncements. It would like to stimulate growth in this rapidly developing field rather than impede it by issuing a deluge of government policy statements, as increased globalization becomes the focal point behind many companies' strategic planning models.

In November 1996, the Clinton Administration, in response to a demand for guidance, issued a policy report indicating that it would not impose any "new" taxes on Internet activities until a more detailed study had been conducted. In May 1997, die "Internet Freedom Act" was the subject of a hearing by the Senate Commerce, Science and Transportation Subcommittee on Communications. This bin would establish a national moratorium on taxes that specifically target the Internet (such as taxes on access or online services). The bill would also require a two-year study of US. and international taxation of Internet commerce, and seeks to have the Clinton Administration be as aggressive as possible internationally in keeping the Internet free of taxes and tariffs. Senior government officials (specifically, Treasury Deputy Secretary Lawrence Summers) have indicated that Treasury will support the objectives and goals of this bill. Mr. Summers said that Treasury opposes any new taxes specifically imposed on electronic commerce, whether imposed by other...