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The European Union is close to agreeing upon a tax on digital sales made over the Internet outside the EC to EU citizens, according to commissioner Frits Bolkestein.

In other words, e-tailers in the US will have to charge and collect VAT on music and software downloads purchased by EU citizens on behalf of the European Union. This will bring them into line with their European counterparts.

In an interview with Bloomberg, Bolkestein, the EU financial services commissioner, said the 15 member states were working out how to share the revenues. This will take a couple of months, he reckons.

Any EU move on this score will probably provoke a dispute with the US, as Bloomberg notes.

Sales over the Internet are exempt from new sales tax in the US, under a moratorium. And Americans are used to avoiding sales tax on purchases made out of state; there is in effect an honour system, with people supposed to pay sales tax on mail order/Internet goods in their own state - but who pays? This easy way to avoid sales tax is one reason for the enormous popularity of mail order in the US and it means that US Internet e-tailers are used to not collecting sales tax too often.

(For more info on the status of Internet taxes in the US, check out this article Longer Internet tax ban sought. Thanks go to reader Paul Stratton for the pointer.)

Taxing Times

The EU is acting extra-territorially by seeking to impose tax collection duties on overseas Internet businesses. But America, which recognises no boundaries in its tax jurisdiction over US citizens and US companies, is in no position to preach on this score.

There seems little commercial logic, so far as the EU is concerned, in having different rates of tax, according to the distribution medium goods are bought, or in which country the shop is based. This is the whole point of the Common market. Why should European governments subsidise, in effect, US Internet ecommerce businesses, at the expense of indigenous players, at the same time lose tax revenues?

Also there seems little social or environment reason for governments to encourage Internet purchases over, say, Mail order, or the High Street. Which is why the EU does not make Internet sales tax exempt.

The problem, so far as we are concerned, is not the principle of paying tax, as such, but rather the level at which such a tax is set. VAT, or value-added tax, is set at relatively high rates in Europe - in the UK, it's 17.5 per cent, for example. This is much higher than sales tax in US states (sometimes zero, often six per cent or so). ®

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