This page contains a collection of recent judgments involving challenges to taxation law regarding internet services. For example, Tennessee sued America Online, claiming that Tennessee has a right to subject AOL to Tennessee state taxes because of such things as AOL maintaining dial-up lines in Tennessee, circulating AOL disks in Tennessee, and having volunteer staff who logged on from Tennessee.
The key word in all this seems to be "nexus", as in "Does a company have sufficient nexus within a state in order to be taxable in that state?"
I have to admit, that in regards my own online games, the idea that we'd have to figure out how to calculate and pay a bewildering array of different tax rates to every single state, country, and locality from which a user accesses us, is unsettling.
In Europe, legislation was evidently recently passed which covers digitally-downloaded software, and makes any such download taxable in the location that it's downloaded *to*, and subject to VAT (Value Added Tax), even if the software is being provided by a non-European company -- Non-EU companies will be required to register (with any European country of their choice), in order to figure out how to get the VAT collected.
Frankly, this sounds like such a bureaucratic nightmare, I can see some companies simply refusing to sell software in certain areas of the world, because of the complexity in working out tax issues.
A NY Times article also came out yesterday discussing the debate over online sales tax issues. NYT registration required, but here's the link:
Internet Law - Taxation & 'Nexus'