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The fact that the Internet is generating huge profits hasn't slipped by the taxman. Find out which rules affect your e-commerce business.

With all the business blossoming on the Web, it's no wonder Internet tax issues are still rearing their ugly heads. Although Congress put the brakes on new access or discriminatory taxes from the states with the enactment of the Internet Tax Freedom Act in October 1998, it still left a host of e-commerce tax issues untouched.

What exactly are discriminatory taxes? In the case of e-commerce, they refer to taxes that designate certain Internet transactions as being taxable, while similar transactions executed through mail order or other means are not. Even though the new Internet law placed a moratorium on these taxes until 2001, state and local levies enacted prior to passage of the law still apply. Thirteen states, for example, are allowed to collect Internet access taxes. Other existing laws, such as one in Vermont holding companies that act as electronic malls responsible for remitting sales tax, are also unaffected by the act.

Even with the moratorium in place, state governments continue to eye e-commerce as a source of considerable tax revenue. Significant stakes are involved. According to Deloitte & Touche LLP, Internet business-to-business transactions could exceed $300 billion by 2002, making the potential for tax revenue enormous. This means entrepreneurs must be ever-vigilant about their potential tax liability when conducting business on the Web.

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This article was originally published in the September 1999 print edition of Entrepreneur with the headline:

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