The Internet not only allows shoppers to view and purchase goods such as computer programs or databases and content such as music or electronic newspapers - it also allows the delivery of many of those goods.
But online commerce is probably uniformly bad news for tax collectors, since Internet sales and services are difficult to monitor and tax. At present when you buy your print copy of The Irish Times in the Republic you pay VAT on the sale, if you download it from the Internet you do not. This creates two problems: firstly, the State must forgo revenue; secondly, the publishers and vendors of printed publications are put at an unfair disadvantage compared with electronic publications.
The problem is compounded by the Internet's global nature: tax might be imposed at the place where the vendor is based, but vendors are likely to base themselves in jurisdictions which don't impose such taxes. Taxes might be imposed on individual purchasers but monitoring the delivery of goods to private individuals over the Internet on a national basis would be extremely difficult. The EU Commission has expressed concern that "the potential speed, untraceability and anonymity of electronic transactions may also create new possibilities for tax avoidance and evasion".
In the US, individual states have responded to these problems by taxing Internet service providers (ISPs). This has been criticised because of its administration costs for ISPs, and because it is often impossible for them to know where their users are located. One suggested method of preserving tax revenues is a "bittax". This was suggested by an expert group on the social aspects of the information society appointed by the European Commission. The tax would be levied on each "bit" (or unit) of information carried by the Internet. Such a tax would increase the cost of Internet access, putting Europeans at a global disadvantage, and it would be difficult to monitor.
The proposal has since been rejected by the European Commission, which pointed out that sales of goods and services in the EU are already subject to VAT. The Commission has made no new suggestions on how to tax the Net but it would appear to be committed to such taxation: "It is vital that tax systems provide legal certainty (so that tax obligations are clear, transparent and predictable), and tax neutrality (so there is no extra burdens on these new activities as compared to more traditional commerce)."
In the US, President Clinton suggested in July that "because the Internet has such explosive potential for prosperity, it should be a global free-trade zone". He expressed the hope that this proposal would be implemented by July next year. US firms would have huge advantages in such a zone, and it might mean that American states would lose revenue from local sales, though overall the USA would benefit as foreigners buy goods and services on the Internet.
There is a danger that a European over-reaction to this may result in over-regulation of the Internet in Europe, making it too expensive - to Europe's economic and cultural loss. Major changes in the US economy, including the shift of the delivery of goods and services to the Internet, are "ticking time bombs" for local government and state finances, according to a new report on taxation for the country's National League of Cities, published last week.
Denis Kelleher is co-author with Karen Murray of Information Technology Law in Ireland, published recently by Butterworths.