Taxing time on the information freeway: The GST axe is chopping into the Internet's famous ability to route around damage.

The new impost is doing more than creating pockets of pain in the e-commerce community. It is eating away at the Internet's fragile status as a semiprotected species in a tax-intensive world.

"We have a number of members who are very unhappy with the effect of the GST on their competitive situation," says Internet Industry Association executive director Peter Coroneos.

One group facing setbacks are e-tailers that sell locally but must compete against international sites offering books, music CDs and wine. Purchasing these consumer items from offshore suppliers GST-free now becomes a tempting option for Australian e-shoppers.

"The only saving graces for Australian e-tailers at the moment are freight costs on overseas goods and the weak Aussie dollar which are buffering them against the 10 per cent price disadvantage they face with the GST," Coroneos said.

The second type of e-business feeling the GST pinch is vendors of digital rather than physical goods and services. This group, which includes domain name supplier Melbourne IT, is not protected against international rivals by higher freight costs and its competitive position absorbed a direct hit on July 1, Coroneos said.

In addition to these large jolts, e-businesses are likely to feel a host of minor pinpricks in the next few months as they struggle to fit the GST into the framework of Internet commerce. The IIA is liaising with the ATO to develop rulings which online business can use for guidance as the practical aspects of GST.

"But a big issue is how a business determines the location of the customer in the online environment. If I order from you and give you my e-mail address, it might be simply a Hotmail address, with no ccTLD (country code) to give away my location. So how are you meant to know whether I am based here and liable for GST charges?"

These and other practical problems are going to make the implementation of GST "something of a nightmare" for online businesses, he says.

By gathering in previously untaxed information flows (such as Gartner research reports), the GST is hastening the day when all Internet transactions will be exposed to the full brunt of tax-gathering mechanisms.

The main defensive bulwark is the US Internet Tax Freedom Act, passed in 1998, which provides protection in America against Internet-specific taxes until October 2001. The legislation is legally binding only in the US but acts as a de facto benchmark in other jurisdictions. Yet the European Commission is moving to enlist offshore providers of electronic services as collectors of the European Union's value-added tax.

The EU proposal gives rise to issues never been faced by tax authorities before, says Rhys Guild, a GST specialist with legal firm Minter Ellison.

"It raises one heck of a compliance issue. They can't put that kind of system in place without the agreement of other jurisdictions both for enforcement and to avoid double taxation and I think countries like Australia would be incredibly reluctant to agree to it."

Attempting to pin down precisely where a transaction takes place can present major problems.

"It can be very difficult for us to determine, particularly if a purchase is made through a credit card," says Net Registry CEO Larry Bloch. "We can ask a customer for a country of origin but given the automatic nature of our transactions, with no humans doing probity checks, they can simply make it up."

The GST will definitely affect Melbourne IT, which sells .com names to a global market. While 10 per cent might not put off customers purchasing a single domain name for around $150, it adds up for reseller customers buying hundreds of names in bulk lots. The GST may encourage Melbourne IT to develop extra value-added components for its business and rely less on straight price competition.

Overseas shipping costs running to several hundred dollars and four to six week delivery periods will protect wine sites against the negative impact of GST price inflation.

"The GST effect will be insignificant," said Bill Gryst, a partner in Australian Wine Multimedia. Gryst's company works the premium end of the market, and in the January to March period European customers generated about 50 per cent of his Internet sales. The cost of grooming his site, www.ozwinenet.com.au, for the arrival of the GST was reasonable, Gryst said. The main expense was $7000 in software engineering costs to sort out international customers and create a separate database price field for them. The biggest GST burden for electronic department store dstore was the imposition of a major stocktake. "It took us five days of 24-hour-a-day effort to get ready," said dstore director of strategy and development David Coleman. "But once it was in place the rest was straightforward." One practical hiccup is being caused by the legislation's insistence on a single GST-inclusive price, which can confuse international customers, he said. "If a doll costs $30, we can't label it as an Australian price of $30 but $28 ex-GST because the government insists on an all-inclusive price."

A workaround might be to generate an ex-GST price list that could only be accessed by international customers but that is proving difficult to implement in software, he said. Overall, dstore is upbeat about the effect of replacing a 22 to 26 per cent wholesale sales tax with a 10 per cent GST.

* Pete Young is a writer for The Industry Standard

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