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Taxes and the World Wide Web

By: Eva Rosenberg


The Internet and the World Wide Web are becoming the new business frontier. Some people compare it to the mad, frenzied gold rush days. With communications technology improving -- and declining in cost -- it is inevitable that not only will more businesses be home-based, but more employees will work from home ... using the Internet.

'Net business profits

In the past, the Internet was the exclusive domain of government and universities. All the accessible information was available for free -- the taxpayers and university supporters picked up the tab. Today, with $19.95 a month or less and unlimited connect time available, practically everyone will have access to the Internet -- much the way television has become a staple in people homes.

Result: More businesses will "spring up" on the Internet. With the influx of new "NetHeads," there will be a whole generation of users who don't expect the Internet to be free. They will be prepared to plunk down their dollars for goods and services across the nebulous ether that is the Internet.

Although it will be a while before net-based businesses become profitable, a whole new world of tax issues and opportunities will have to be explored. As Internet businesses increase, tax agencies will develop ways to tap into the wealth. Since they haven't yet, the savvy businessperson has some tax-reduction alternatives.

Where, oh where will my net-business be?

When selling air (use of a site) on the Internet, you can locate your business anywhere in the country.

Are you selling goods? Pick the cheapest tax home to ship them from -- it doesn't have to be where you live, unless you are manufacturing those goods. Even then, you can sell them to your company located in a United States or some international tax haven.

Only services can't be moved without moving the body (bodies) that provide those services.

All you have to do is make the proper arrangements to create a business presence in the location of your choice. Use agents or mailbox services to receive and forward your mail, toll-free phone numbers and fulfillment services to ship your merchandise. Naturally, you must comply with the local rules of operation of your tax-reduced site.

Business, business everywhere, but not a tax to pay?

To avoid state sales taxes, locate your business in one of the following states: Alaska, Delaware, Montana, New Hampshire or Oregon.

To avoid state income taxes, do business in: Alaska, Florida, Nevada, South Dakota, Texas, Washington or Wyoming. (Only Alaska has neither a sales tax nor an income tax.)

There's more to taxes than meets the eye

Other taxes to consider when selecting a location for an Internet-based business, are those taxes or quasi-taxes charged by cities, counties and parishes. They can charge you for permits, license fees, zoning, city taxes, local value-added taxes and payroll taxes, to name but a few.

Then, remember you may need to deal with gasoline taxes, tariffs, luxury taxes, duties, use taxes, customs, cigarette taxes or value-added taxes. And what about the new potential flat taxes?

Piece of the pie

Moving a business to Alaska would eliminate both state income and sales taxes for the business owner, but what about the states to which you ship the products -- or the user's state -- will they tax the transaction?

Also, remember, as you flow the income back to you, your home state may lay claims on the profits. That's where setting up the right kind of business entity is critical. A C-corporation will let you leave the profits in your tax haven. However, it may require that you take certain salary levels in a profitable business.

One caveat: taxes are fluid, governments assess new ones all the time. There is talk of finding a way to tax Internet transactions based on where they originate and where they end -- but what about the states and countries the data is passed through? Will they lay claim to a tax too?



Eva Rosenberg, EA, MBA, has been preparing taxes long enough to remember income averaging and interest deductions. Her Encino, CA, tax practice focuses on non-filers and the self-employed. The Tax Tips columnist for Self-Employed America, Eva is also the resident tax expert for several organizations on the Internet, the author or co-author of several books and articles. She has taught at UCLA, USC, UCI, CSUF and is a sought-after speaker at conventions, tax seminars, workshops, radio and television. She does a "stand-up tax" routine that is both informative and funny. Eva is frequently consulted by EAs, CPAs, attorneys and her former students regarding audits and Tax Court petitions. A Member of NAEA for over a decade, Eva has served on the CSEA state board and the San Fernando Valley Chapter's board.

Eva has also created a fanciful gift registry on the Internet at URL: http://www.mywishlist.com and can be reached by e-mail at taxwriter@taxmama.com

copyright 1998, Eva Rosenberg, All Rights Reserved

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