More on the TAX you are supposed to collect if you sell to Europe

[MrPopup]

EU Stirs Up Internet Sales Tax Debate
Value-Added Tax Could Provide Ammunition for Supporters of Taxing E-Commerce in the United States

By Brian Krebs
washingtonpost.com Staff Writer
Monday, June 9, 2003; 6:29 PM

The term "laissez-faire" comes from France, but it's the United States that has applied the economic term in its purest sense to business on the Internet, banning Internet-specific taxes and dragging its feet on taxing e-commerce retail sales.

Europe's latest economic policy export isn't getting such an enthusiastic embrace from the American lawmakers and the business community .

On July 1, the 15-nation EU will begin collecting the VAT, or value-added tax, on sales of digital goods and other electronic transactions from U.S. and other non-EU companies. This means that American companies selling downloadable music, movies, games and software to customers in the EU might have to collect taxes that could boost the total cost of their products in Europe by as much as 25 percent.

For companies like America Online and Internet auction giant eBay, it means additional costs for restructuring their European operations, as well as possible price increases for their customers.

For the U.S. business community, it presents a radically different philosophy on taxes. VAT is one of the EU's primary revenue sources, and online consumer sales in the union always have been subject to it. In the United States, however, building a consensus on taxing e-commerce sales has proved far more difficult. More than 30 states are collaborating on an Internet sales tax framework, but the hurdles to putting it in place are numerous. While some major Internet retailers are collecting sales taxes, they remain the exception rather than the rule.

If the EU is successful in requiring VAT collection by American firms, observers say it could set an important precedent for taxing Internet commerce in the United States.

"Governments from South America to China are looking to Europe as the source of the latest in regulatory innovations," said Gary Litman, vice president for Europe and Eurasia at the U.S. Chamber of Commerce. "I can see a lot of countries looking abroad and saying, 'If Brussels can regulate this, why can't we?'"

Jonathan Todd, a spokesman for the European Commission, agreed. "Some of the opposition to this measure appears to be driven by the fear that it could serve as a precedent for taxing e-commerce within the U.S.," he said.

The EU's decision to tax digital sales from all over the world is born of a desire to tax e-commerce companies equally. American companies now enjoy a price advantage over EU-based businesses because they don't have to pay VAT, the EU says.

U.S. businesses say VAT will put them at a disadvantage because they either must comply with 15 different tax codes, or establish a European office. European companies, by contrast, only charge the tax rate of the country where they are located.

E-commerce companies in the United States have been reluctant to open up their coffers to state taxes, but many of them already are complying with the new EU rules. Last week, online auction giant eBay Inc. said it would start charging its sellers VAT to comply with the new regulations. The company in its annual report said the change could slow the expansion of its fast-growing international unit, which accounts for nearly 30 percent of its sales so far this year.

American companies have two general options for complying with the VAT. They either can register their business and set up a headquarters in one EU country, and pay that country's tax rate. If they do not set up a physical headquarters in Europe, they would pay the tax rate for the country where the customer lives -- ranging from 15 percent in Luxembourg to 25 percent in Sweden.

Dulles, Va.-based America Online said last month that it would move its European headquarters to Luxembourg. The move, which included a significant expansion of its office, major technological changes and the addition of two dozen new employees, was costly, a spokeswoman said, but beat the alternative of complying with 15 tax codes.

"Doing nothing just wouldn't be a viable option for us," said AOL International spokeswoman Mia Kulla.

AOL officials would not comment on how much revenue will be up for taxation. The company has more than 6 million subscribers in Europe, and most of them pay the equivalent of $24 a month for Internet access -? an estimated cost of $22 million per month under Luxembourg's VAT. Despite the added tax, the company does not plan to immediately raise its monthly service fee.

Amazon.com said it plans to charge VAT on the commissions it collects for hosting its online auctions. The company also will collect the tax on sales of downloadable software and e-books, a spokesman said.

Processing VAT receipts is one thing for large firms experienced in working across borders, but smaller Internet retailers will have more trouble adjusting to the new system, said Mark Bohannon, senior vice president of public policy at the Software & Information Industry Association.

"There's a distinct possibility that non-European businesses are going to be dealing with a lot of confusion on July 1," he said.

Some businesses simply will ignore the shift, either because they figure they cannot be prosecuted or because they won't know that the system has changed, said Peter Merrill, a partner at PriceWaterhouseCoopers.

Another difficulty U.S. businesses say they will face is verifying a customer's identity. Sophisticated Internet users can mask their locations in order to escape paying sales taxes or make it look like they live in an EU country with a low VAT rate.

"There is a great concern that if a customer lies to you ... that EU governments are going to make vendors pay the tax themselves, leaving the vendor with virtually no ability to go after the buyer," Merrill said.

The debate has attracted the attention of the Bush administration, which has said that subjecting U.S. and European companies to different tax schemes could amount to an illegal trade practice.

"We have to consider not just how the VAT plan will affect us today, but also how will this impact where U.S. businesses will want to go in the years ahead," a senior Treasury official said last month in an interview. "At this point, the [VAT directive] looks like it could put a crimp in those plans."

In a letter last week to U.S. Trade Representative Robert B. Zoellick, a bipartisan group of a dozen House lawmakers urged the White House to challenge the agreement before the World Trade Organization.

"These remain challenging times for many American Internet companies," wrote Rep. Cliff Stearns (R-Fla.), chairman of a House trade panel. "They are fighting hard to make their businesses work and to reach global markets, thus helping drive the American economy. We ask that they be given a fair chance and a level playing field."

In the end, the EU's application of VAT to Internet sales could amount to a welcome trojan horse for states already pursuing a national Internet sales tax plan.

"Companies will have to put in place procedures and software to implement VAT, and once they've done that it's relatively easy to do the same in the U.S.," said James Lewis, director of the technology and public policy program at the Center for Strategic and International Studies. "The states who want to tax e-commerce can point to the EU experiment. The big Internet companies will have changed how they operate to make it easier to implement VAT."

[MrPopup]

EU Law Taxes Overseas Net Firms

LONDON -- They've survived the bursting of the tech bubble, a global economic downturn and the occasional virus, but now overseas Internet retailers may see their European profit push derailed by one of the oldest drags on business: tax.

On July 1, a new EU directive goes into effect requiring all Internet firms to account for value-added tax, or VAT, on "digital sales."

The law adds a 15 to 25 percent levy on select Internet transactions such as software and music downloads, monthly subscriptions to an Internet service provider and on any product purchased through an online auction anywhere in the 15-member bloc of nations.

The VAT tax is nothing new for some Net firms. European dot-coms have been charging customers VAT since their inception. Their overseas rivals though have been exempt, making foreign firms an obvious choice for the bargain-hunting consumer.

"It's a massive competitive disadvantage. It's good to see at last it (is) being eroded," said David Melville, general counsel of British Internet service provider Freeserve, a division of French ISP Wanadoo.

Freeserve has lobbied furiously for the past two years to get the loophole closed, saying its chief rival AOL U.K., the Internet unit of AOL Time Warner, saved 150 million pounds ($249.7 million) in tax payments over the years.

The affected companies are handling the new tax load in a variety of ways.

AOL Europe has relocated its continental headquarters to tiny Luxembourg, one of the EU's cheaper tax regimes.

Seattle-based retailer Amazon.com said the new tax regime will affect its auctions, plus marketplace and Z-shops operations where third-party new and used items are sold.

Plus, VAT will now be charged on software downloads and the sale of e-books, Amazon said.

"We'll go out shortly to our seller community about how these changes will impact fees we currently charge," Amazon spokeswoman Patricia Smith said.

Online auctioneer eBay will swallow the VAT charge on behalf of consumers in a host of its smaller European operations such as France and Italy. But in Britain and Germany, its largest and most profitable European units, the company has hiked fees to reflect the higher VAT charges.

For example, a British seller will pay six pounds to list an automobile and 35 pounds for real estate, both 20 percent increases that include the England's 17.5 percent VAT charge.

Analysts say the new tax could dent sales in the short term, a blow for American dot-coms such as eBay and Amazon that are banking on higher growth in their overseas business.

For European firms there's little sympathy. "The old way certainly gave non-EU companies a leg up during a very crucial stage in the development of the market," said Freeserve general counsel Melville.

[Serge_Oprano]

..and American based porners won't do Jack Shit and there is nothing EY can do about it...

[MrPopup]

Originally posted by Serge_Oprano
..and American based porners won't do Jack Shit and there is nothing EY can do about it...

until it is used as political leverage to institute an american internet tax.

[andi_germany]

I think if I read this right it is only applied to web businesses that sell goods in one case or another. Download music and movies is aimed at file sharing companies that sell the music for like 99 cents a song.

Now most adult sites don't sell anything of this kind. The sell access to their site. If you just claim that usage of the site is free and the membership fee is just for bandwidth costs the member uses there should be no VAT at all. I seriously doubt they will go after adult sites at all. The whole thing is just aimed at big international cooperations that uses foreign headquaters to do business in the EU without paying the VAT.