NCPA - National Center for Policy Analysis

A Digital V.A.T.?

August 24, 2000

Some European Union politicians want U.S. companies to collect the value-added tax (VAT) when a European consumer downloads a digital product or service from a U.S.-based company.

  • The VAT -- which can add as much as 25 percent to the cost of a product -- is usually charged at the point of entry on "tangible" products shipped from the United States.
  • However, on June 7, the European Commission proposed that U.S. companies be required to collect a VAT on all sales of digital products to Europe.
  • If the proposal becomes law -- which could happen later this year -- U.S. businesses would have to register with the tax agency of at least one EU member country, ascertain the location and tax status of every customer, transmit tax payments electronically to the relevant tax authority, and submit to audits and "due diligence examinations" to prevent cheating.

Under current rules, European consumers have an incentive to shop VAT-free from U.S. companies, which also makes the United States an attractive market for e-commerce investors. European companies rightly complain about that disparity, but EU leaders could simply exempt digital products and services from the VAT.

Enforcement will be difficult without Washington's help, but Europe's tax collectors are determined to try.

  • U.S. businesses with branch offices in Europe, for example, could probably be forced to comply.
  • Another option being considered is "blacking out" the websites of companies that refuse to register for VAT collection.
  • Europe is also calling for increased "international collaboration" on tax collection, meaning the IRS would monitor U.S. companies' compliance with EU tax law.

The digital-VAT already has allies among U.S. state and local politicians who want businesses to collect taxes on sales of products destined for other states.

Source: Aaron Lukas, "The VAT-Man Cometh?" August 21, 2000, Cato Institute


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