States Move To Tax Internet Sales

Faced with the loss of billions of dollars in telephony taxes because of the ban on Internet-access taxes, some states are now moving to collect sales tax on goods purchased over the Internet.

The nation's two largest states--California and New York--have added lines to their state income-tax forms this year requiring taxpayers to declare sales taxes owed on out-of-state purchases.

The tax figure is not a trifling amount: The National Governors Association estimates $35 billion will be lost this year from Web purchases on which no taxes were paid. At the same time, Senator Lamar Alexander--who is worried that states will lose $20 billion a year in telephony and ISP taxes--is leading a battle to institute Web-access taxes.

Taxpayers have always owed the sales taxes, but very few of them realize it. "That's always a problem, making people aware of this liability," California Equalization Board spokesman Vic Anderson told the Associated Press. "It's one of the most misunderstood taxes out there."

In New York, Assemblyman Ronald Tocci has introduced a bill to remove the item from the state's tax forms, saying it's impossible for taxpayers to keep track of sales taxes on out-of-state purchases. Tocci said the provision threatened to make tax evaders out of law-abiding taxpayers and policemen out of tax preparers.States and local governments have long argued that the solution is to see to it that taxes are collected at the point-of-origin: typically from merchants selling goods who would simply add the required state and local taxes. The problem is that different states tax different items at different rates, so the problem remains.

A massive tax shortfall is looming for states and local governments as VoIP begins to take off, as well. Some members of Congress and the FCC have been arguing to keep a ban on Internet-access charges to promote use of the Internet. About 18 percent of telephony charges are currently taken up by access charges, and most of that could be lost as VoIP takes off.