Non-European E-Businesses Must Charge Sales Tax

Effective July 1, 2003, non-EU companies delivering electronic services over the Internet will have to collect value added tax (VAT) from their EU customers. Under European Council Directive 2002/38/EC, suppliers of electronic services will have to register with a Member State of their choice through a simplified registration scheme. Tax collected from EU customers will then be remitted to the Member State, who will re-allocate the VAT revenue to the country of the customer. The measures are designed to level the playing field between EU and non-EU suppliers. Some examples of "electronically supplied services" affected by the new rules are:

• website supply, web hosting and distance maintenance of programs and equipment;
• supply and updating of software;
• supply of images, text and information, and provision of access to databases;
• supply of music, films and games (including gambling games), and of political, cultural, artistic, sporting, scientific and entertainment broadcasts and events; and
• distance teaching.

The new rules do not affect transactions of physical goods, or transactions whose only online component is the exchange of emails. Suppliers need not have a European office to be subject to the rules. The location of the end-customer in an EU Member State is what governs. The tax rate will be the standard rate applicable in the end-customer's Member State. Services that fall under the Directive are not currently eligible for reduced or zero rates, even though some analogous physical products (such as books and newspapers) are taxed at lower than standard rates. Companies affected by the new rules will be obliged to keep detailed records of the VAT they collect in EURO and will need to file annual returns. The system has been criticized, particularly by the United States, which views the system as discriminatory and burdensome to US suppliers. The US has maintained a moratorium on so-called "Net taxes". There are reports that the United States may take the case to the World Trade Organization. To view the Directive: http://europa.eu.int/eur-lex/en/dat/2002/l_128/l_12820020515en00410044.pdf To read a summary of the new rules: http://www.europa.eu.int/comm/taxation_customs/taxation/ecommerce/vat_en.htm