The tax man cometh — online

Mixed bag
The results were a mixed bag. The new "streamlined" rules change the way sales taxes are assessed: You pay based on where the goods end up, instead of where the transaction takes place. Buy a TV in a neighboring town, and you pay the tax rate of the town where you have it delivered.

Local governments in 83 counties would have received a total of $44.7 million more in sales taxes in 2003 had the new rules been in place. But governments in another 12 counties would have seen their revenue decrease by a total of nearly $15 million. For small towns and sparsely populated counties, that's real money.

Or rather, it would be if there were a reliable way to get consumers and businesses to cough up on their Internet purchases, which there isn't. This brings me back to Gov. Doyle in Wisconsin, whose administration admits there's no reliable way to enforce the proposed change to the law. Most businesses won't bother to collect, and most consumers won't pay.

Smokers targeted
This can lead to stupid behavior on the part of taxing authorities. Take the case of smokers in New York City who ordered cigarettes online to avoid paying local tobacco taxes. The city — citing a federal law from the 1940s — is now cracking down and hitting those consumers with bills for back tobacco taxes that in some cases amount to thousands of dollars.

As reported this week in USA Today, New York has targeted 3,700 people who ordered smokes online and thus ducked local taxes. Of those 2,010 had paid up to the tune of $680,000, a little more than half of what's owed. That's a rounding error in a city that will collect $29 billion in taxes this year.

This makes me wonder if all this effort to collect taxes on Internet purchases is worth it. As huge a force as e-commerce may seem, it's still only a small part of the U.S. retail economy, accounting for $18.4 billion or 2 percent of the $938.5 billion in retail sales in the fourth quarter of 2004, according the Commerce Department.

If Internet sales are ever going to amount for a bigger slice of the economy, irritating tax schemes — no matter how "streamlined" — aren't going to help.

MORE FROM FORBES

Forbes Section Front

Dirtiest vehicles on America’s highways The worlds most powerful people The key to dealing with lousy boss: negotiation IRS rules for medical deductions are sickening Tailgate much? These are the rides you need What automakers have in store for 2010 Top-earning dead celebrity? Not Jackson Need to fire someone? Here’s what to do America’s highest-paid female CEOS Cars with the worst fuel economy Forbes Section Front