Prime Minister John Key grappled this week with one of the toughest tasks any modern government has to deal with - how to tax the new economy that is evaporating into the stateless and tax-free cloud.

Key talked about getting Apple to collect 2c GST on every $1.29 digital download. He was 17c short of the mark but still 2c more than for any online purchase. He talked about New Zealand requiring online stores to pay GST, even if the OECD can't get everyone to do so.

Tax collectors throughout the world are scratching their heads over the issue, dreaming up ways to niggle the online giants to collect cash from every transaction.

They want the likes of Amazon, Google, Apple, Netflix and UK online fashion retailer Asos to hand it on to governments to pay for the services that used to be paid for from GST, Paye and corporate taxes.

It is the financial and diplomatic equivalent of herding cats into a synchronised swimming display for a live-streaming version of YouTube.

The irony is that such a display would make Google a mountain of tax-free cash from the advertising.

Many of these behemoths are hoping the killjoys will throw their hands in the air and go back to their chequebooks. Those consumers should think again.

As hard as it is, Key was right to back Revenue Minister Todd McClay, who quietly told a conference of financial advisers in Queenstown last week he had asked officials to look at the unilateral moves some governments have taken to impose consumption taxes on physical and virtual online sales.

South Africa changed its rules from June 1 last year to require suppliers of digital services to register for VAT (value-added tax) and collect the tax at the point of payment. Initial signs are positive.

The question now is how long New Zealand and the rest of the connected world can wait for a negotiated and co-ordinated international solution.

The economy is evaporating into the cloud as the services sector is dragged out of its offices and shops and sucked into the world of apps. Financial services, retailing, medical services, education, accounting, advertising and television are dissolving into bits and bytes.

The Advertising Standards Authority provided figures this week showing $589 million was spent by New Zealand companies on online advertising last year, the first year it surpassed newspaper advertising ($484m). And it was only just behind TV advertising ($614m) and is up from $15m in 2004.

TVNZ, TV3 and the newspaper companies diligently pay tax and collect GST, but most of that online advertising is being spent with Google, Facebook and a plethora of overseas sites that don't pay tax here.

The numbers are just as big in retailing. The monthly BNZ/Marketview survey of online retailing estimated New Zealanders are buying $1.2 billion a year of clothes, shoes, music, hardware and electronics from overseas sites.

It is growing at 14 per cent a year, almost quadruple the growth rate of sales from bricks-and-mortar stores here.

Total online sales are still just under 7 per cent of total retail sales, but total online sales could grow $3.5b over the next decade.

A jumbo jet full of clothes flies into Australia every week to be distributed from Asos warehouses there to front doors throughout Australasia. No GST is paid, given our tax-free threshold is $400 and Australia's is A$1000.

The Retailers Association reckons the Government is missing out on $400m a year of GST. Treasury reports GST receipts have consistently under-performed forecasts in recent months.

This was highlighted this week when Netflix said it would offer its service here from overseas and would not collect or pay GST.

Spark was among the first to protest the unfairness of this, given its Lightbox service does charge GST. Sky TV will be the next to object.

Key and Labour leader Andrew Little, who supported the move to charge GST on overseas purchases online, should be congratulated.

The alternative is higher income taxes or fewer Government services.

- Herald on Sunday