Internet Sales Tax Fairness — European Union

Unlike the United States, the European Union never considered making the internet a tax-free zone. To exempt internet sales from taxation, in the European view, would be to violate the principle of neutrality, as described in an OECD report on the “framework conditions” for electronic commerce.

Taxation should seek to be neutral and equitable between forms of electronic commerce and between conventional and electronic forms of commerce. Business decisions should be motivated by economic rather than tax considerations. Taxpayers in similar situations carrying out similar transactions should be subject to similar levels of taxation.

All E.U. purchases are subject to a value-added tax, or VAT, which is similar to U.S. states’ sales taxes on retail goods. Each of the 15 E.U. member states has its own VAT rate, ranging from 15-25 percent of the price of the good sold. Here is how the collection of VAT operates in five different e-commerce situations:

Situation 1: A supplier in E.U. member nation A sells a product to a business customer in E.U. member nation B. The supplier checks the validity of the VAT registration number the customer gave him against a central database, which is maintained by the national tax authorities of nation B. The supplier quotes the customer’s VAT registration number on the invoice and dispatches the goods (without charging VAT). Businesses are charged VAT on their purchases, but this is a provisionary tax, which is reimbursed once they sell the product.

Situation 2: A supplier in nation A sells a product to a private individual or organization in nation B that does not have a VAT registration number. If the value of the supplier’s sales in country B exceeds a certain pre-determined limit (usually 100,000 Euro a year) that supplier must register with the VAT authorities in state B, charge local VAT and file returns there.

Situation 3: A customer living in an E.U. nation buys goods from outside the E.U. These goods are considered imports, and are subject to customs duty and VAT upon being imported. However, there is a key exception. Goods worth under UK 18Pd (about $27 USD) such as Cds or books, are not subject to either VAT or customs duty. Small items are apparently considered not worth the customs paperwork.

Situation 4: A U.S. customer buys a product over the internet from a European vendor. No VAT is paid. However, if she visits the E.U., she pays VAT on an item purchased there, but then is reimbursed upon leaving European territory.

Situation 5: A customer in European country A purchases downloadable music or software over the internet. The European Union treats these transactions as services for tax purposes. Under VAT rules, services(unlike goods) are taxed at the place where they are provided. Thus, the European operator is often obliged to charge tax on all such sales, no matter where the customer is located. On the other hand, a non-E.U. supplier can sell to European customers free of tax, since at present it is logistically impossible for the tax authorities to monitor such transactions. The EC is currently working on ways to change this.

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Stacy Mitchell

Stacy Mitchell is co-director of the Institute for Local Self-Reliance and directs its Independent Business Initiative, which produces research and designs policy to counter concentrated corporate power and strengthen local economies.