Sidebar: Verifying Customer Locations Won't Be Easy, Execs Say

Computerworld - U.S. companies faced with collecting the European Union's value-added tax (VAT) on sales of digital goods and services last week said that confirming the countries in which customers are based will be a big challenge.
A representative of the U.S. Council for International Business said in testimony before a U.S. Senate subcommittee that the group is "deeply concerned" about requiring non-EU companies to collect the tax based on the location of European customers.
That aspect of the VAT directive "ignores the fact that most firms lack the technical means of verifying this information in a cost-effective manner," said Karen Myers, chairman of the New York-based council's subcommittee on e-commerce taxation.
The requirement that non-EU companies collect the tax is due to go into effect on July 1, and the process of collecting it is complicated by the fact that the 15 EU member nations have set different levy rates. Companies that don't have a physical presence in Europe are required to assess the VAT on a country-by-country basis, depending on where customers reside.
Businesses with European operations can apply the tax rate of the country where their subsidiary is based to all digital purchases by EU customers. However, even those companies will likely want to pinpoint the locations of customers so they can be sure the VAT needs to be assessed in the first place, according to some U.S. executives.
A set of guidelines prepared by the EU says sellers should ask buyers to declare where they live and then verify that information against credit card billing addresses or by using geo-location tools. The document notes that more detailed guidance will be provided by the taxing authorities in the individual EU nations.
But contrary to the EU's advice, European data privacy laws prevent companies from doing address checks on credit card numbers, said Matt Voda, senior director of product marketing at Digital River Inc in Eden Prairie, Minn. Voda said the e-commerce outsourcing company determines the locations of its clients' customers based on the IP addresses of the computers used to make online purchases. A third-party vendor traces the IP addresses to the countries where they're located.
"How you determine the location of the buyer is one of the greatest areas of ambiguity in the [VAT] directive," said Jon Abolins, vice president of tax and government affairs at Taxware, a Salem, Mass.-based division of GovOne Solutions LP that sells e-commerce software.
"Self-declaration is not sufficient," Abolins said, noting that European customers will surely be tempted to evade taxes by meanssuch as spoofing IP addresses to indicate they live in a country with one of the lower VAT rates.