June 30, 2003
(Computerworld)
The European Union's 15 member nations has begun imposing a value-added tax on digital sales to residents by non-European companies, a plan that has forced many U.S. businesses to undertake months of legal and technical preparations.
Complicating matters is the fact that the VAT varies from country to country, ranging from 15% in Luxembourg to 25% in Denmark and Sweden. As a result, some U.S. companies have had to choose between two costly alternatives: updating their e-commerce systems to track sales and initiate VAT payments at the various rates, or setting up new operations in one of the member countries so they can apply its tax rate to all digital sales throughout the EU.
"It's one more onerous process forced on people trying to do Internet e-commerce," said Joel Ronning, CEO of Digital River Inc., an Eden Prairie, Minn.-based company that develops and manages e-commerce Web sites for businesses. "It's turning into a mess."
Digital River, whose clients include Motorola Inc., 3M Co. and Staples Inc., has spent "millions of dollars" to get ready for the VAT, Ronning said. As part of its preparations, the company set up a subsidiary in London. That lets it charge the U.K. VAT rate of 17.5% to all European customers who download products from its clients.
Ronning said the centralized operation includes systems that can handle all European business, including databases that correlate the locations of customers and track the VATs in different jurisdictions for comparative purposes.
By today, companies based outside the EU were supposed to register with European tax authorities to levy, collect and remit the VAT on sales of various digital goods and services.
Under a directive issued by the EU in May 2002, companies that don't have a physical presence in an EU member nation must assess the tax at the rates charged by the countries where individual customers are located.
AOL International, a division of New York-based AOL Time Warner Inc., has about 6.3 million dial-up and broadband customers in Europe and in response to the VAT has centralized its Internet service provider operations for the EU in Luxembourg, said spokeswoman Mia Kulla.
"If we hadn't done this, we would have had to comply with 15 different tax regimes, which was not a viable business option," Kulla said. She declined to comment on how much it has cost AOL International to set up the operations in Luxembourg but said the VAT won't result in higher prices for customers.
On the other hand, Scott Pendergrast, co-founder of Fictionwise Inc. in Chatham, N.J., said it wouldn't have been economically feasible to invest in a European operation. Instead, the seller of e-books is preparing to collect the tax in different countries, although Pendergrast said it's doing so reluctantly.
"I think paying it is ridiculous, and it's unfair for a foreign government to make me a tax collector," he said. "I have enough trouble keeping track of the the U.S. tax code."
Pendergrast said he plans to assign one of Fictionwise's two internal developers to write code to automate the VAT assessment and remittance process, although he believes the company is exempt from the tax for now because its annual European sales total less than 100,000 euros ($114,283). However, an EU spokesman said there is no such exemption.
Some businesses are questioning whether they need to collect the new tax on the grounds that European courts wouldn't have jurisdiction over them, said Jon Abolins, vice president of tax and government affairs at Taxware, a Salem, Mass.-based division of GovOne Solutions LP that develops e-commerce software.
Taxware has been hearing from some customers that are "scrambling" to get ready for the VAT, but others are asking if they can just ignore it, Abolins said. He has been advising companies not to do so, because there is speculation that EU countries might not fight to protect the intellectual property rights of sellers that fail to collect the VAT. "I don't think any business wants to be characterized in the EU as a tax cheat," he added.
Matthew King, a trade spokesman for the European Commission, the EU's executive arm, said it will be up to each of the 15 nations to decide how to enforce the VAT directive. According to King, the EU approved the VAT plan after content providers based in Europe complained that they were at a competitive disadvantage because they already have to collect the tax.