U.S. companies' sales to EU consumers subject to VAT on digital downloads.

• Author: Fitzgerald, Sarah
• Position: Value-added tax on digitized goods and services

U.S. companies selling digitized goods to individuals (as opposed to businesses) in the European Union (EU) will soon have to collect and remit value-added tax (VAT) to the EU. Currently, U.S. companies are not responsible for accounting for or paying these taxes. This change came about because the EU Economic and Financial Affairs (ECOFIN) Council approved a directive to require non-EU vendors to collect and remit EU VAT on digital goods and services supplied to EU consumers (the Directive). The ECOFIN Council enumerated an illustrative list of digital goods and services that the Directive intends to cover (although it may also include items not on the list), including website supply; web-hosting; distance maintenance of programs and equipment; supply and updating of software; supply of images, text and information and making databases available; supply of music, films and games (including games of chance and gambling games); political, cultural, artistic, sporting, scientific and entertainment broadcasts and events; and the supply of distance teaching. No minimum threshold applies to sales amounts. For VAT registration, each EU member state can adopt its current threshold.

On April 25, 2002, the European Parliament (Parliament) raised procedural objections to the Directive. These objections create an additional procedural requirement that must be met before the Directive can be implemented. If the ECOFIN Council does not object to the findings of the Parliament, the Council will send the Directive to the Parliament for its consideration and (expected) approval. However, if the ECOFIN Council objects to the Parliament's actions, and adopts the Directive in its current form without regard to Parliament's suggestions, Parliament may appeal to the European Court of Justice in Luxembourg for a ruling on the correct interpretation of the procedural rules. In either event, additional procedural actions will need to be taken before the Directive can be approved and implemented in the EU member states.

The Directive requires each member state to change its individual laws to bring them into conformity by July 1, 2003. Note: Despite this, countries can make the change earlier. The requirement to collect and remit EU VAT will expire after three years. However, if the member states unanimously agree, they can extend the law beyond that period.

Issues

U.S. companies have many concerns about the new provision. For example, the Directive does not...