Battle Brewing Over European E-Tail Tax Plan

An agreement over value-added tax (VAT) reached thisweek by the European Union (EU) could cause troublefor U.S. Internet companies and international trade,according to a report by Gartner.

The proposal could be “a significant problem” for U.S.e-tailers, Gartner analyst French Caldwell told the E-Commerce Times.

It also could cause international conflict. Gartnerpreviously has predicted that differences between EU andU.S. tax laws will become a major source of frictionin international trade by 2003. In a report releasedThursday, the research firm said, “The EU’s decision to moveforward with its proposals raises the probability.”

Digital Disadvantage

The plan calls for all non-EU companies to startcharging European residents sales tax on digitalproducts like music and software downloads. Similarproducts sold by EU-based companies are already taxed,as are goods like books and CDs.

The problem, as the United States sees it, is that while EUcompanies charge tax based on where their headquarters is located,U.S. companies would be required to charge tax based onwhere the buyer lives.

That means European companies could charge a flat taxrate for all purchases made by European customers,while U.S. and other non-EU companies would have todetermine where each buyer resides before calculatingtax. Such a process would place a significantadministrative and technological burden on U.S. e-tailers.

U.S. Concerns

U.S.-based Web retailers worry that they may have to charge more taxthan a European e-tailer, even to the same customer.

“Customers in like situationsshould be taxed alike,” Margaret Dawson, internationalspokesperson for Amazon.com (Nasdaq:AMZN), told the E-Commerce Times. “There shouldn’t be avariance in how customers are treated.”

If the directive is approved, Dawson said, Amazon hopes that resulting regulations will be “very clear, easy to complywith and easy to program with current technology.”

U.S. Deputy Treasury Secretary Kenneth Dam called for”further efforts to achieve a more global consensus that reflects aconsideration of all the issues raised.” He pointedto current discussions on e-commerce tax issues beingheld at the Organization for Economic Cooperation andDevelopment (OECD).

“The OECD process is moving along at a decent pace. Itseems like the EU has decided to drop out of thatprocess and take action unilaterally, which is notreally helpful,” Caldwell said.

Road Blocks

The proposal has a long way to go before it becomeslaw, however. First, it must be approved by all EUcountries. That process will take at least 18months, and at least one country — the United Kingdom — has seriousobjections. “I’d be surprised if this proposal makesit through,” Caldwell said.

Even if the policy is approved, Caldwell said, it willbe unenforceable, because it will be impossible todetermine whether an EU consumer has downloadeddigital goods from a server based outside the EU. “Andhow are you going to charge VAT on Web services?That’s the next thing,” Caldwell added.

There may even be legal trouble. The U.S. SupremeCourt has ruled that companies cannot be forced tocollect taxes on interstate sales when they do nothave a physical presence in the consumer’s state.

According to the Gartner report, if that ruling is extends to international sales, U.S. companies could belegally barred from collecting value-added tax on behalf of EU countries.

In the end, the EU’s proposed policy may come back tohaunt it.

“The bigger problem is not for the U.S.companies, it’s a problem for EU companies potentiallylocked out of the U.S. market if the U.S. decides toretaliate,” Caldwell said.

1 Comment

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