NCPA - National Center for Policy Analysis

Europe Debates Internet Sales Tax

March 2, 2000

While the U.S. is debating the pros and cons of taxing items sold over the Internet, Europe is moving in the direction of collecting a tax on music and software delivered over the World Wide Web.

  • The European Commission is proposing to collect a value-added tax -- a type of sales tax -- on software, music and videos that can be turned into digital code and downloaded by customers anywhere.
  • Physical goods -- such as books and clothes -- are already taxed at the rate of the country where the product originated if they are sent across national boundaries.
  • Value-added tax rates vary from country to country -- ranging from about 12 percent to more than 20 percent.
  • American companies have begun to complain that they would be saddled with onerous responsibilities that could stifle electronic commerce in Europe.

Sales of "virtual" products differ from marketing of physical goods, because the former can be sent just as easily from the U.S. or off-shore tax havens like the Cayman Islands as they can from a local store in France.

Under proposals that officials are debating in Brussels, products sold in digital form would be taxed based on the rate of the purchaser's country. That means that companies operating in the U.S. would have to collect the taxes on all sales to European customers. Experts say that companies would have to differentiate between 15 different tax regimes and determine whether the transaction involved private individuals or companies -- because the two types of customers are taxed differently.

Source: Edmund L. Andrews, "Europe Plans to Collect Tax on Some Internet Transactions," New York Times, March 2, 2000.


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