Overall, the paper was welcomed by infotech executives who hailed its cautious tone and its recommendation that online commerce be treated similarly to conventional commerce.

"We agree with its conclusions and we're pleased" with its rejection of calls for new taxes on
online activities, said Sara Fitzgerald, a spokeswoman for the Interactive Services Association, a Silver Spring, Md.-based alliance of online companies. New taxes would undermine the growth of the industry, she said.

During the next few months, said a Treasury official, the U.S. government will use the paper to create international tax agreements that minimize extra taxation of online commerce. To ensure such agreements, the United States is already participating in discussions at the Paris-based Organization for Economic Cooperation and Development.

For example, some governments may wish to tax companies that sell products online, while other governments may try to tax the online buyers, resulting in double taxation of online commerce, he said.

Another related issue is defining the location - or the residence - of the people and companies whose income from online commerce is to be taxed. Governments may tax online income based on the physical location of the seller or the location where the transaction takes place. But online transactions take place on quickly moved locations in cyberspace, pushing governments toward residence-based taxation, according to the paper.

"The growth of new communications technologies and electronic commerce will likely require that principles of residence-based taxation assume even greater importance. In the world of cyberspace, it is often difficult, if not impossible, to apply traditional source concepts to link an item of income with a specific geographical location," said the paper. The United States already has 48 international tax treaties, most of which rely on residence-based taxation, said the paper.

However, residence-based taxation of online commerce can prompt companies to move their headquarters to wherever the taxes are lowest, making it difficult for overseas governments and states to impose higher-than-average taxes on companies.

Also, "the private sector has already figured out the means of defeating residency-based taxation" with such technologies as software agents that can be programmed to buy products and services in cyberspace without revealing the buyers' residence, said Dan Bucks, executive director of the Washington-based Multistate Tax Commission. The commission, which has not taken a position on the Treasury Department's tax paper, helps draft tax agreements among U.S. states.

A recent paper by the industry-backed ISA urged states not to tax online commerce, but added that any taxes should be imposed on buyers, rather than online companies. The taxes should also be uniform across states, said the paper.

The Treasury Department's paper also urged governments to draft more exact rules for classifying transactions of intellectual property, such as computer programs, books, music or images.

Also, governments must find methods to curb online tax evasion through the use of electronic cash, including identifying merchants and buyers, and recording transactions, said the paper.