| abstract
| - On July 1, 2003, the European Union (EU) began requiring U.S. and other firms located outside the EU to pay value added tax (VAT) on the sale of goods and services digitally delivered to individual consumers in EU Member States. The VAT on E-Commerce Directive amended earlier EU tax legislation, changing the rules for VAT collection on digitally delivered products. EU firms are no longer required to pay tax on exports from the EU. Non-EU firms are now required to pay a tax on their sales to individual consumers within the EU (imports into the EU). EU firms pay the single VAT rate for the country where they are located. (As described below, these changes conform the tax treatment of digital commerce to that of other goods and services.) If a non-EU firm establishes a subsidiary in an EU country, it can follow the tax rules for EU companies and pay a single rate. Otherwise, non-EU firms are required to register in one EU country and pay the VAT on each sale at the tax rate in the customer’s home EU country. Thus, non-EU companies must collect potentially up to 25 separate VAT rates, corresponding to the 25 member countries of the EU. A value added tax is a broad-based consumption tax on goods and services, levied at each stage of production. Under the EU's credit-invoice VAT, a business receives a credit for the VAT paid on its purchases of inputs against the tax due on its sales of output. The VAT is typically rebated on exports and imposed on imports. In contrast, the retail sales tax used by U.S. states is levied primarily on goods, at the point of final sale. The United States is the only major economy that does not levy some form of VAT. Prior to July 1, 2003, EU e-commerce transactions, including goods and services delivered in both tangible and digital form, were taxed under the EC (European Community) Sixth VAT Directive (Directive 77/388/EEC). The VAT was collected from EU companies on all sales, including exports to customers outside of Europe. As noted above, this contrasted to the treatment of other exports, for which the VAT was rebated. For EU companies, no distinction was made between physically and digitally delivered goods. In contrast, non-EU companies were taxed on imports of tangible goods and services but not taxed on imports electronically delivered into Europe. The EU's taxation of digital commerce by non-EU firms moves counter to a stated U.S. goal of keeping Internet transactions free from tax, both within the United States and worldwide. However, it moves in the direction favored by many U.S. states of broadening the state sales tax base to include digital goods and services and of supporting interjurisdictional tax collection.
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