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Europe’s Global Tax

The tendrils of European taxation have gone global, thanks to a new digital tax. Since July 1, under the aegis of "leveling the playing field," the European Union (EU) has been imposing a value added tax (VAT) on digital goods — namely games, music, and software — downloaded from non-EU companies via the Internet by ...

The tendrils of European taxation have gone global, thanks to a new digital tax. Since July 1, under the aegis of "leveling the playing field," the European Union (EU) has been imposing a value added tax (VAT) on digital goods — namely games, music, and software — downloaded from non-EU companies via the Internet by EU citizens. Previously, the Internet allowed EU shoppers, who pay 15 to 25 percent VAT at home, to enjoy the virtual world of duty-free shopping.

When the EU began considering the move in 2000, critics doubted its ability to enforce the policy overseas. To comply, non-EU businesses are required either to set up headquarters in a EU nation and charge the corresponding VAT or stay home (usually in the United States) and charge the VAT rate of the customer’s home country. Companies could ignore the new rules and challenge Brussels to enforce its authority outside its borders. But several major Internet commerce players have undermined the non-compliance clause by agreeing to collect taxes for the EU.

Amazon.com, whose e-books and auctions have been hit by the tax, now charges VAT based on customer location. So does eBay.com, which adjusted its fee structure to accommodate the new tax and set up a frequently asked questions VAT page (pages.ebay.co.uk/vat-landing/faq/). America Online (AOL) set up shop in Luxembourg, home of the EU’s lowest VAT rate of 15 percent — a move that pleased French-owned Freeserve, AOL’s main competition in the United Kingdom, which claims AOL saved $249.7 million in tax payments while operating tax-free. Opponents, of course, say it was the consumers who saved this money.

Ironically, nowhere is the EU’s new directive more closely watched than in the 41 cash-strapped U.S. states that have signed on to the Streamlined Sales Tax Project (SSTP), www.streamlinedsalestax.org. The SSTP would make it easier for states to collect taxes on Internet purchases — an extra-territorial money grab strikingly similar to the EU’s plan. And the EU’s new online tax may force U.S. companies to adopt the technological architecture that cross-state tax collection would require.

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