Governments have long grappled with how, if at all, to regulate the global flow of images and information over the Internet, seeking to balance concerns about free speech, for example, with those about pornography.
But only recently have policy-makers in Washington, in state capitals and around the world begun to confront the economic implications of a new retail marketplace without political or geographical boundaries.The issues involved are sweeping. Where does a transaction take place when buyer and seller can be defined to be in multiple locations? Will the borderless nature of the Internet force governments further down a road that has already led them to drop trade barriers, harmonize tax policies and form currency unions?
On a more immediate level, many governors and state legislatures are convinced that such commerce will present in greatly magnified form the same problem they have faced for years with the L.L. Beans of the world that sell by phone and mail from catalogs: Although consumers are technically liable for sales taxes, companies have to collect taxes only in states where they keep a physical presence. Although some merchants collect the tax even where they are not required to do so, most do not.
The lost revenue for states is relatively trivial now but could mount substantially in coming years as the volume of business on the Internet grows. Though estimates vary widely, some analysts see the electronic market growing to hundreds of billions of dollars annually within the next decade, from next to nothing a few years ago.
The states are also under pressure from traditional retailers, who see their Internet competitors as operating in a tax-free zone that will draw customers away from Main Street and the mall.