'Net sales taxes

As Internet retail establishes itself as a new source of revenue for many businesses, governments are positioning themselves to make sure they don't lose out.

When people buy products across state lines, they're supposed to pay sales tax to the state in which they live.

"What most people don't realize," explains tax expert Dan Sullivan, "is if you order something from L.L.Bean (in Maine), legally you're supposed to submit taxes to the state (of Massachusetts). Nobody does it. The state doesn't press it, because there's no way to control that."

And it didn't matter so much in the past because the loss is minimal in a traditional economy. But Internet retail drops all barriers to people buying products across state lines.

"It's hurting Massachusetts," Sullivan says, "from the point of view they're losing sales tax revenue."

Sullivan's company, Salem-based Taxware International Inc., is working on a pilot project that could help states collect those taxes from Internet companies.

"If it works," Sullivan says, "all the states are going to jump on the bandwagon."

His basic idea is to make it easy and cheap for small businesses to collect Internet taxes.

Taxware sells a computer program that automatically calculates how much tax each customer owes and adds it to their bill. Tax laws change so quickly, and are so complicated, that Taxware updates the computer program for its clients constantly.

The service works for big corporations _ WalMart, Sears Roebuck, Home Depot _ but it is too expensive for small Internet businesses selling products across state lines.

So Taxware wants to put its software on a server and let small companies access it from a cash register hooked up to the Internet. That way the companies don't have to buy the software themselves.

In fact, Sullivan believes the system will bring in so much tax revenue, the states would be willing to pay for it and the merchant wouldn't have to pay anything.

Taxware is test the system this year in a pilot program with merchants in Wisconsin, Kansas, Michigan and North Carolina. If it works, and if is more successful that ideas by other companies, 39 states are prepared to adopt it.

Sullivan is optimistic about the success of his idea.

"The tax revenues area going to increase dramatically," he says, "and hopefully the politicians would be able to reduce the tax rates."

Now that, of course, is another question.