Battle Brewing Over European E-Tail Tax Plan

The proposal could be "a significant problem" for U.S. e-tailers, Gartner analyst French Caldwell told the E-Commerce Times.

It also could cause international conflict. Gartner previously has predicted that differences between EU and U.S. tax laws will become a major source of friction in international trade by 2003. In a report released Thursday, the research firm said, "The EU's decision to move forward with its proposals raises the probability."

Digital Disadvantage

The plan calls for all non-EU companies to start charging European residents sales tax on digital products like music and software downloads. Similar products sold by EU-based companies are already taxed, as are goods like books and CDs.

The problem, as the United States sees it, is that while EU companies charge tax based on where their headquarters is located, U.S. companies would be required to charge tax based on where the buyer lives.

That means European companies could charge a flat tax rate for all purchases made by European customers, while U.S. and other non-EU companies would have to determine where each buyer resides before calculating tax. Such a process would place a significant administrative and technological burden on U.S. e-tailers.

U.S. Concerns

U.S.-based Web retailers worry that they may have to charge more tax than a European e-tailer, even to the same customer.

"Customers in like situations should be taxed alike," Margaret Dawson, international spokesperson for Amazon.com (Nasdaq: AMZN), told the E-Commerce Times. "There shouldn't be a variance in how customers are treated."

If the directive is approved, Dawson said, Amazon hopes that resulting regulations will be "very clear, easy to comply with and easy to program with current technology."

U.S. Deputy Treasury Secretary Kenneth Dam called for "further efforts to achieve a more global consensus that reflects a consideration of all the issues raised." He pointed to current discussions on e-commerce tax issues being held at the Organization for Economic Cooperation and Development (OECD).

"The OECD process is moving along at a decent pace. It seems like the EU has decided to drop out of that process and take action unilaterally, which is not really helpful," Caldwell said.

Road Blocks

The proposal has a long way to go before it becomes law, however. First, it must be approved by all EU countries. That process will take at least 18 months, and at least one country -- the United Kingdom -- has serious objections. "I'd be surprised if this proposal makes it through," Caldwell said.

Even if the policy is approved, Caldwell said, it will be unenforceable, because it will be impossible to determine whether an EU consumer has downloaded digital goods from a server based outside the EU. "And how are you going to charge VAT on Web services? That's the next thing," Caldwell added.

There may even be legal trouble. The U.S. Supreme Court has ruled that companies cannot be forced to collect taxes on interstate sales when they do not have a physical presence in the consumer's state.

According to the Gartner report, if that ruling is extends to international sales, U.S. companies could be legally barred from collecting value-added tax on behalf of EU countries.

In the end, the EU's proposed policy may come back to haunt it.

"The bigger problem is not for the U.S. companies, it's a problem for EU companies potentially locked out of the U.S. market if the U.S. decides to retaliate," Caldwell said.