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No Escape?

Even the Internet may not be able to avoid taxes.

That dark cloud on the horizon is the controversial specter of taxation on the Internet, and it's gaining strength. State governments feel they are losing a rightful revenue stream. Local brick-and-mortar businesses feel the tax-free Internet represents unfair competition. Internet sellers believe dealing with a myriad of tax laws in states where they don't have a physical presence would be confusing and cost-prohibitive. They all have legitimate concerns.

The current congressional moratorium on Internet taxes is set to expire in November 2003. Meanwhile, the states have been talking amongst themselves. Last year, 32 states approved model legislation, dubbed the Streamlined Sales Tax System, that would take giant steps toward cleaning up the tangle of state and local tax laws. Some large online retailers have already altered their sales tax collecting systems to come into line with this agreement that also allows them to avoid owing back taxes.

Not surprisingly, most online retailers aren't so enthusiastic. The Direct Marketing Association has said the plan could still represent a "burden on interstate marketers." Others argue that the simplifications aren't simple enough. Online entrepreneurs who lack resources to overhaul their systems to come into compliance could be in a difficult position. Still, it's doubtful the Internet will escape taxation forever when state governments are struggling with shrinking revenues. Keep an eye on Congress this fall, and visit www.streamlinedsalestax.org for more on the state initiatives.

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This article was originally published in the April 2003 print edition of Entrepreneur with the headline: No Escape?.

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