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The tax free status enables online stores - including Amazon, Asda, Boots, Tesco and Woolworth's - to undercut prices on the mainland, which is estimated to cost the UK government around £80m, rising to £200m over the next two years. CDs sell for as little as £8 while DVDs can be picked up for about £12.

However the Jersey government is less concerned with that and more worried about the effect on the local economy. It is currently pursuing an economic plan that will generate extra tax revenue and create 'high value' jobs, and does not consider that the CD and DVD resellers fit into that plan. It is also concerned about the effect that they have on the island's reputation.

'The selling structure which is adopted by the retailer is little better than a sham,' it said in a statement. 'The vendor, or the vendor's parent company, and the purchaser are both located in the United Kingdom.

The online retailers have 12 months to apply for an operating licence, though under their current business model they will not receive one, according to the policy statement.

The EU's Low Value Consignment Relief (LVCR) rules any item bought for less than £18 can be individually imported to the UK from the Channel Islands without the imposition of VAT. As well as its impact on UK tax revenues, LVCR is also affecting small business in the UK, which have called on the Treasury to close the loophole.

The Forum of Private Business (FPB), a trade group that lobbies on behalf of small and medium-sized enterprises (SMEs), is urging the government to lower the price level at which goods are exempt from VAT under the LVCR to about £7, which it says would make the Channel Island-based businesses unprofitable. It also wants the Treasury to seek a special dispensation from the EU that would allow it to close the loophole; as a precedent, Denmark has already been granted a similar dispensation.

Although music retailers are the worst-affected, tax-free imports have also hit opticians through cheap contact lenses and firms selling vitamins and food supplements.