Beware, the Taxman Cometh to Cyberspace : Communications: States see a gold mine in online sales. They should target the revenue for computer-deficient schools.

If you spend a lot of time online, you’ve already learned to cope with scam artists and flamers. But the next time you log on, you could encounter a segment of society that scares even the most hardened denizen of cyberspace.

Tax collectors.

State tax collectors, to be precise. Unlike the federal government, states get a large portion of their total revenue from sales taxes, and they will soon be fighting to collect taxes on every sale--from cubic zirconia rings to sophisticated software--made in cyberspace.

Just ask the inhabitants of postal space. A few years ago, the Supreme Court confirmed a longstanding ruling: Mail-order companies don’t have to collect state sales taxes from customers unless the companies do something more in that state than just take orders by mail or telephone. Only Congress could do away with this “something more” requirement, the court declared.

So the states asked Congress for help against the mail-order industry. They got nothing. As one state tax official put it to me, “Congress will never vote to raise taxes that it can’t spend.”

But the states aren’t about to give up. The “something more” rule costs state and local governments more than $3 billion a year. It also hurts Main Street stores that sell in physical space and can’t afford to compete with mail order companies charging no sales tax.

So every year, the states pass new laws that stretch the definition of “something more.” Every year, they launch new audits of catalogue companies, trying to catch them doing “something more.” And every year, they doggedly litigate about how to apply the “something more” standard. With considerable success. Indeed, some catalogue companies have found that it’s easier just to collect the taxes than to keep fighting.

How does cybercommerce fit into all this? Like Bambi on the opening day of hunting season. Applying the lessons of the mail-order wars, state governments are already gunning for online merchants who don’t collect state taxes. Services like CompuServe and Prodigy face state tax audits and litigation. Next the states will set their sights on companies that use the Internet and World Wide Web.

In short, merchants planning to sell things on-line can either collect taxes for all 50 states (and thousands of local governments) or put their lawyers and accountants on permanent standby to handle and endless series of audits and tax claims.

Win or lose, it’s hard to imagine anything worse for electronic commerce than years of litigation about what kind of online contacts with a state constitute the “something more” that gives the state jurisdiction over the seller. As soon as the rules have been laboriously worked out for one technology, another will emerge. The courts may never catch up. Meanwhile, uncertainty will mean fewer new businesses on the Net, and that in turn will mean less revenue to improve the Net’s performance.

Is there a way out of this fix?

Well, maybe. Surprisingly, there are at least two reasons why on-line sellers might want to accept federal legislation that lets the states tax all on-line sales.

First, unlike the mail-order industry, on-line merchants don’t have the resources for an endless war with the states.

Second, relying on litigation could split the on-line industry. Services like America On Line or CompuServe have local phone lines and servers in every state. That gives the states a pretty strong “something more” claim against both the commercial services and everyone who sells through them. The Internet and World Wide Web, by contrast, have much less in the way of local contacts and corporate identity. Like the Main Street merchants, commercial services such as CompuServe can’t afford to get stuck collecting state taxes while their competitors on the Web do not.

Congress, of course, still may wonder why it should help raise taxes that someone else will spend. One answer is for the states to earmark the money for something that national leaders of both parties want but can’t afford.

Suppose the states agree that half of the revenue raised from online taxes will be spent improving access to the information infrastructure. Some states might decide to spend the money underwriting Internet accounts for schools and libraries; others might fund fiber optic lines in rural areas. Let the states set their own priorities; Congress can take credit for the overall policy.

Some will suffer as a result of such a bill. I don’t mean the consumers who will pay the taxes or the online companies that will collect them, since both of these groups will benefit from the network improvements that the taxes fund.

The big losers will be those lovers of the English language who cringe at every new “information superhighway” metaphor. Because, if the bill does pass, no force on Earth can keep Congress from designating the earmarked state revenues as the “Information Superhighway Trust Fund.”