VAT on the Way

Companies selling digital services to buyers in the European Union (EU) will soon have to pay the Value Add Tax (VAT). This means that if you sell any service from your Web site (e.g. a download, a pay-for-view content, etc.) then you are responsible for charging the appropriate VAT tax if your customer is located in a EU country.

Those international companies with a subsidiary in a EU country may pay that country's VAT regardless of what country the buyer is located in. Consequently, AOL has moved its European headquarters to Luxembourg, which has the second lowest VAT in the EU. For the moment at least, they are not going to increase the price of their services to reflect the new tax.

On the other hand, companies not based in the EU have to pay each country's individual VAT according to the location of the buyer. There are 15 different countries, each with their own VAT. eBay has passed off the 15% (Luxembourg) to 25% (Sweden) price increase to its customers.

Trying to accurately determine a user's country of origin is practically impossible. Nevertheless, the burden has been placed on businesses with no assurance that they will not be held responsible if a user willfully or accidentally deceives the business into charging a lower VAT than required.

For many smaller businesses with little pressence in the EU, it may be cheaper and safer to simply stop offering services to users in those countries. Very few existing sites are equiped to differentiate between users of various countries. As such, both sites and pricing models will have to be overhauled to accommodate the VAT.

Unfortunately, ignoring the problem is not a long term solution. Many US states are working on a similar tax. Traditionally, states like Massachusettes have placed the onus on residents to turn in their "use tax," which would include anything purchased online, from computers to digital services.

With over 30 states already behind a nation wide e-commerce sales tax, our own VAT is not far off. Business owners making changes to their Web sites to accommodate the EU VAT should take into account the eventuality of a similar tax in the United States.

The EU VAT goes into effect July 1, 2003.

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