1/1/2004

In case you haven't heard, the European Union has extended its VAT tax to cover e-commerce; that is, electronically supplied services to customers located anywhere in the European Union. Is this a big development? You bet.

First, VAT taxes are steep, ranging from 25 percent in Denmark to 15 percent in Luxembourg. Second, lots of U.S. businesses are going to be subjected to the new tax. For many it will come as a surprise.

The new regime went into effect on July 1, 2003. Prior to that, VAT was applied based on the residence of the supplier. Under the old regime, E.U.-based businesses charged for covered services that were exported outside of the E.U., but businesses outside of the E.U. did not have to charge VAT on covered services supplied to E.U. customers. Under the new regime VAT will be applied based on the residence of the customer, not the supplier, meaning that U.S. businesses supplying software updates, Web site hosting, Web site creation, electronic data, or other electronic services, will, for the first time, be subject to VAT.

Comment: The new law will have a major impact on U.S. exporters of electronic services. What remains to be determined is how the various taxing authorities in the E.U. member countries will determine when taxable transactions have occurred and how they will enforce the laws against foreign companies.

Jere M. Webb
503.294.9460
jmwebb@stoel.com