Why are indirect taxes hot for e-commerce businesses?

• Author: Heroux, Mark

The reach of indirect taxes is expanding. In these times of thriving e-commerce businesses, more and more countries are shifting the focus from direct taxes to indirect taxes and implementing such taxes as value-added tax (VAT), sales tax, and goods and services tax, affecting companies doing business across the globe. This discussion provides an update on the status of indirect taxes for e-commerce businesses, the expected changes to the European Union VAT and U.S. state and local sales tax, and the difficulties for businesses selling goods to consumers through their websites or platforms such as Amazon or eBay.

VAT in the EU

VAT is a consumption tax, taxing the value added to the goods and services sold in every transaction in the supply chain. The final consumer carries the burden of the VAT payment as the other parties in the supply chain, in principle, recover the VAT they paid. This leads to a benefit for tax authorities, as VAT generates revenue whenever a supply takes place, without considering factors such as salary or profit, as is done with income taxes. Apart from special cases, VAT imposes the same tax rate on everybody.

As e-commerce businesses are booming, the European Council has already adopted new VAT rules in relation to international trade and ecommerce, and more will apply as of July 1, 2021. These rules should create an equal market between EU and non-EU businesses, such as U.S. companies, and mitigate the risk of VAT fraud. These rules will have an immense effect on e-commerce supplies from countries outside the EU. Changes include:

* Abolishment of the VAT exemption for imports of small consignments with a value of up to [euro]22 (approximately $25);

* Offering to businesses that supply goods from countries outside the EU to customers inside the EU the option to file only one VAT return for all their distance sales from countries outside the EU, for consignments with an intrinsic value of no more than [euro]150 (approximately $170); and

* A special arrangement for levying VAT on importation, allowing certain businesses (i.e., mail or postal companies) to collect the import VAT from the person for whom the goods are destined.

Another change ensures that businesses will be responsible for paying the VAT due on e-commerce sales if they facilitate sales via electronic interfaces such as online marketplaces or platforms (e.g., Amazon or eBay). As these platforms are involved in substantial numbers of online sales all over...