The Online Taxman Cometh

CAN TAX COLLECTORS GET their hooks into cyberspace? As more companies do business online, states are slavering. Their problem is that a seller cannot be forced to collect sales tax for a state unless it has a "physical presence" there, such as employees or property, notes Michael Lippman, partner at KPMG Peat Marwick. The same rule applies to catalog sellers such as L.L. Bean, which only collects sales tax from Maine residents.

Some states are mulling ways to expand the definition of presence to customers' PC screens. "As commerce goes more electronic, there's a lot of revenue escaping taxation," says Michael Goral, an attorney at the Multistate Tax Commission, which coordinates state tax policies. "We're not looking to tax anything new," says Tim Leathers, the Arkansas official who chairs the MTC. "We're just following changes in the industry."

But don't tell that to online merchants. "The MTC is flirting with saying that a flow of electrons is physical presence," contends Robert Levering, senior vice-president of the Direct Marketing Assn. "What they want to do is extend it to metaphysical presence."

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