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. Last Updated: 07/27/2016

Internet Eyed as Source of Tax Money

WASHINGTON -- The tax man has arrived in cyberspace, another sign the formerly freewheeling world of the Internet and online services is growing older and richer.

State and local tax collectors are training their cross hairs on the Internet world as a source of revenue. Internet companies fear high taxes and paperwork could stifle the computer network and price it out of reach of some users.

"State and local taxes can cost the online and Internet industry millions of dollars, both in terms of the taxes themselves and the costs of developing new billing systems to collect and pay the taxes," said Robert Smith, executive director of the Interactive Services Association, which represents major computer online and Internet companies.

A few states -- such as Tennessee, West Virginia, Texas, and New York -- already impose taxes on companies that link consumers or businesses to the Internet, or that offer computer bulletin boards and electronic mail.

The state taxes on Internet and online services typically are 5 percent to 6 percent, and come on top of local taxes which range anywhere from 0.25 percent to 2.75 percent.

The taxes are not targeted directly at the Internet but fall under existing telecommunications or sales taxes and are passed on to consumers and businesses. Even in Microsoft Corp.'s home state of Washington, Tacoma has entered the act. The city imposed a 6 percent tax on companies that link residents to the Internet. The tax, under attack from politicians and facing a review, is a telephone tax.

Several states and cities -- including Florida, New York state, California, Massachusetts, Washington state and Seattle -- are studying the issue just when Uncle Sam is tightening its grip on the federal money available to states and localities.