Point, click, tax? Myths and realities of internet taxation.

The concept of Internet taxation has generated a great deal of inflamed rhetoric, combined with some misinformation. It's important to keep the parties straight and to identify what facet of Internet activities could give rise to taxable events. With this understanding, property owners and managers can assess the impact of Internet taxation on their retail tenants.

A Little Background

As Internet technology burst onto the scene, several states decided imposing a tax on Internet users could provide a steady and growing revenue stream. Consequently, the Internet service providers (ISPs) went to Congress in hopes of securing a pre-emption to prevent states from imposing taxes on Internet access and content. In addition, they sought rules preventing states from imposing "multiple or discriminatory" taxes, which would tax Internet transactions differently from similar retail or mail order transactions.

At the same time, American business, particularly in the retail sector, was realizing the Internet could be a powerful sales tool. When it came to retail, state and local governments were deeply concerned Internet sales would significantly decrease sales tax revenues. So the clamor began. State and local governments worried about sales tax revenues, small business worried about unfair competition and the ISPs worried about having their infant technology taxed out of existence before it had a chance to mature.

How Does Internet Taxation Work?

By the time Congress had imposed an Internet tax moratorium, the various parties were affected as follows:

* State and local governments: Free to work together to develop standards for collecting sales tax on interstate transactions for all retail transactions, including Internet and mail order. Thirty-eight states joined the Streamlined Sales Tax Project and are continuing to refine their rules.

* ISPs: Succeeded in convincing Congress to bar states from imposing sales taxes on Internet access or creating multiple or discriminatory taxes.

* Small businesses: Discovered the Internet has opened new markets as they develop a combination Internet and mail order model. The Streamlined Sales Tax Project is attempting to accommodate small businesses so they will not face undue compliance burdens by having to file sales tax returns with all 50 states.