China's Administration for Industry and Commerce last year asked online vendors to register their information and apply for business licenses.
An online seller in Wuhan, Hubei Province, has been ordered to pay 4.3 million yuan (US$664,600) in business tax, as the city becomes the first city government to tax Internet vendors.
Industry people said the move may force online vendors to raise prices while others said it could hurt the city's economy if online sellers move their operations elsewhere.
This comes after the Administration for Industry and Commerce last year asked online vendors to register their information and apply for business licenses.
The business, a women's clothing retailer, had annual sales of more than 100 million yuan last year.
Wuhan's stance has triggered heated discussion among vendors and industry figures in the online community. Some fear online bargains won't be so easy to find in the future as higher operating costs will be passed on to customers.
Wuhan local media quoted officials from the taxation bureau stating that it will tax another four big Taobao vendors and strengthen regulation against smaller sellers.
The vendor, known as "100f1," recorded more than 2 million transactions over the past few years.
"The government administration should encourage smaller vendors because many live off their income from their online shops," said Huang Minxue, professor at Wuhan University.
But for online vendors running a business entity, taxation is acceptable, he added.
Online shopping transactions totaled 498 billion yuan in 2010, accounting for 3.2 percent of total consumer retail sales volume, according to Beijing-based Internet research and consulting firm China IntelliConsulting Corp.
"It's not the right time to tax most Taobao vendors because most aren't profitable and many manufacturing companies and courier services depend on their operation," a vendor named "flywn" wrote on his blog site on Sina.com.
