net.wars: Eat, drink, and enjoy your cheap downloads, for tomorrow we tax

by Wendy M Grossman | posted on 28 June 2003

As of July 1, American companies, too, can enjoy the fun, fun, fun! of collecting VAT and trying to make sense of the utter illogic and vast detail of the rules. Hint to folks in the US: it's almost, but not quite, utterly unlike sales tax.

Wendy M Grossman

Sales tax (I say as a natural-born American), makes sense: you pay it as a flat, consistent percentage added onto the purchase price when you buy something in the state you live in, and you collect it when you sell something in the state you live in. If you, say, live in New York and buy kitchen furniture from Amazon.com in the state of Washington, you don't pay. In fact, sales tax is why Amazon.com chose to locate in the state of Washington: there isn't any in that state, and therefore the company would never have to charge it even on in-state purchases. Jeff Bezos was pretty smart about that one.

The fact that sales tax is added at the cash register - something Europeans find unfair - is actually a benefit: it means you're never in doubt about how much you're paying in sales tax. It is my belief that this is the reason the highest rate of sales tax in the US is New York City's, at 8.25 percent, while EU rates of VAT, hidden in the purchase price, hover nearer 20 percent. Try to charge that in the US and people would riot. Or buy everything mail order.

This is a tax loophole that has favoured American companies for a long time, and they seem to think it's somehow unfair for it to go away. It was a huge advantage for companies like CompuServe and, later, AOL as well as eBay and many others, who started with a 20-25 percent advantage over local businesses even before you take into account the generally lower cost of doing business in the US (lower telecommunications costs, cheaper computers, cheaper infrastructure, and so on). None of these businesses did anything wrong - if you didn't have to register for a tax, would you? CompuServe's servers were in Cincinnati, and the company was accordingly regarded as supplying telecommunications services from Ohio.

It was, however, a hugely unfair situation for companies like Demon Internet, Pipex, CIX, and the others that pioneered competing indigenous services, who rather resented it. From that standpoint, quite a few people's reaction to the news that they're now going to have to pay tax on downloads from outside the EU is, weirdly, "Good." My own reaction is a little more like, "Damn!" and "I wonder if it's possible to cheat by entering a US address?"

American companies will still have a significant advantage over European ones, because where European companies have to register in any country in which their sales are above a certain threshold (which varies from country to country, as do the registration requirements) non-EU companies will be allowed to pick one country and register there.

AOL, for example, has picked Luxembourg, which has the cheapest (15%) VAT rate in the EU. Ebay, which has a real presence in a number of countries, will now begin charging VAT on its seller fees, has revamped its fee structure entirely, and will be charging different VAT rates in the UK, Sweden, and Ireland. It is, however, true that EU businesses of course are not required to charge sales tax to US consumers unless they have a presence in their state. But you could hardly call EU companies doing business in the US advantaged by that, given how suspicious many Americans seem to be of buying from abroad.

Internet life is, of course, a lot simpler without taxes, and the US has tended to favour avoiding imposing them in the interests of encouraging the Internet's growth. The current moratorium on Internet taxes is due to expire in November, and the Bush administration is backing a bill that's making its way through Congress that would bar taxing Internet access fees; Congress has not passed legislation to allow states to collect sales tax on purchases made over the Internet.

In the current economic climate, however, with many states experiencing budget shortfalls, it's likely there will be a lot of pressure to impose such taxes. Let's face it, online businesses do siphon sales (and therefore taxes) away from local jurisdictions in many cases. Given that the population that buys online is typically more affluent, it's arguably unfair not to tax online sales. However: at least at this point, avoiding tax probably isn't a reason for most people to buy online. Lower prices overall are of course an important factor. But bigger factors than that are convenience, wider choice, and, often, better service.

Tax evasion will, of course, still be with us. Obviously it's easy enough to spot big companies like eBay and AOL and force them to register. But without hugely invasive policies the EU is not going to be able to police a small business in, say, Athabasca which sells the odd bit of downloadable music. They'd have to examine all our credit card bills. And, of course, the hard disks of our computers as we sneak through the green channel with new software installed on our laptops. Oh, well, it's been a good run. And it is fairer this way.

It's kind of amusing, though, in that while the EU is panicking about VAT which is not being paid on downloadables, the RIAA is gearing up to go after hundreds of people giving the stuff away. You just can't win, can you?

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Wendy M. Grossman’s Web site has an extensive archive of her books, articles, and music, and an archive of all the earlier columns in this series. Readers are welcome to post here, at net.wars home, follow on Twitter or send email to netwars(at) skeptic.demon.co.uk (but please turn off HTML).