Federal and state governments wrestle with cybertaxes.

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 countries or at the Federal or local level. However, the National Governors Association opposes the bill, noting that it would unfairly exempt taxpayers seeking clarification of existing tax law from state and local revenue departments. Other local tax department heads are fearful that the bill could have a devastating impact on state and local government bonds.

State governments are not only battling the intent of the Federal government, but are also not in agreement as to how the individual states should address the issue. Since only a few states have sales tax laws that directly address the taxation of Internet access, rulings, regulations and releases on the topic are not very abundant. Some states impose sales tax on Internet access services, while others do not. States differ on the basis on which taxation is determined. Even the characterization on Internet services as computer services, information services or telecommunications services differs among states. A recently conducted survey indicated: [] Twenty-two states do not impose sales tax on monthly service charges for Internet access. [] Some of these states do not subject telecommunications services to sales tax, while others impose sales tax on telecommunications services in general, but do not tax Internet services. [] Many states indicated that, while they would not tax Internet services, they would tax products sold online to a purchaser within the state by an out-of-state seller.

These results simply illustrate the uncertainty and differing approaches taken by state and local tax administrations. In addition, many of the underlying theories on how to tax Internet services will change as issues are challenged and rulings are issued.

With all this uncertainty, one thing is certain: consumers, tax agencies and industry will need guidance about Internet taxation at not only the state and local level, but also in the national and international arenas.