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Europe to U.S.: Tax This!

Just when American e-commerce companies thought they were safe from new Internet taxes comes news that the European Union plans to tax digital products downloaded from U.S. companies.

And that is certainly not good news for companies that have been trying to broaden their income streams by appealing to international markets.

President Bush last November signed a two-year extension of the ban on new Internet taxes in the United States.

But now, the EU wants to level the playing field for European companies. EU Taxation Commissioner Frits Bolkestein was quoted as saying that the new tax rules "will remove the serious competitive handicap which EU firms currently face."

Bolkestein said that since U.S. companies levy no sales taxes for online purchases, European buyers are finding cheaper digital goods -- software, videos and music -- on sites operated by American companies, according to an Associated Press report.

The tax affects all non-European Internet businesses selling digital products, whether in the United States or elsewhere.

And a separate measure that taxes hard goods purchased over the Internet and shipped to customers might be considered in the future, according to an EU spokesman in New York City.

In theory, American companies would have to determine electronically that a purchaser is located in a European country and then add the appropriate tax for that country.

U.S. trade authorities have said they may lodge a complaint against the initiative at the World Trade Organization.

U.S. e-commerce interests had feared a quagmire of conflicting tax rates from various tax-levying bodies in this country and lobbied hard for the extension of the tax moratorium in the United States.

Now they may face a variety of different tax rates, which are often called "value-added" taxes in Europe. Each of the EU's 15 countries taxes different products at different rates.

European consumers will pay only their own country's so-called value-added tax. U.S. companies would be forced to charge customers the prevailing rate in force where their customers live. General value-added rates vary from 15 percent in Luxembourg to 25 percent in Sweden.

U.S. trade officials and e-commerce execs are worried that the result is going to be a difficult-to-enforce tax system that more or less ignores the global nature of the Internet and hampers e-commerce in general. The measure is scheduled to take effect July 1, 2003,

Rep. Mark Foley, R-Fla., who chairs a congressional task force on the entertainment industry, told the AP he hopes the EU doesn't expand the tax to cover all goods sold online.

"They have single-handedly reversed a fiscally sound philosophy of keeping the Internet tax-free," Foley said. "The only ones who will suffer are their own people."