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

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.”

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