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The European Union is preparing to strike another blow against the still-recovering Internet economy, by requiring a new tax on digital services.

The new regulation takes effect July 1. It requires companies outside the E.U. to collect value-added tax (VAT, a European sales tax) on digital services. The rule will affect private individuals more than business customers.

It means higher prices for European consumers and more expense for companies outside the E.U. that do digital business in Europe. The measure was originally approved more than a year ago. Despite protests, it is now taking effect.

The European Council Directive states, "Digital delivery within the E.U. of software and computer services generally, plus information and cultural, artistic, sporting, scientific, educational, or entertainment services, specifically will be subject to VAT. When such services are supplied for consumption outside the E.U., they are exempt from VAT."

Self-Assessment

Under the rules, no obligations will be imposed on non-E.U. suppliers selling to business customers in the European Union (which constitute at least 90 percent of the market, according to the E.U.): "Since the VAT will be paid by the importing company under self-assessment arrangements."

However, the rules require suppliers of digital products from outside the E.U. to charge VAT on sales to private consumers.

The directive covers the gamut of electronic services: "Web site supply; Web hosting; distance maintenance of programs and equipment; supply of software and updating of that software; supply of images, text and information and making databases available; supply of music, films and games, including games of chance and gambling games, and of political, cultural, artistic, sporting, scientific and entertainment broadcasts and events." Distance teaching is also affected.

VAT attack

This means a consumer in England can expect to pay VAT on digital goods acquired from a company based outside the E.U. It also means that the vendor will have to administrate the collection of such tax, and deliver the money collected to the E.U.

The European Commission states that to deliver such services, "non-E.U. suppliers will be required to register using special simplified arrangements with a VAT authority in any one Member State of their choice and to levy VAT at the rate applicable in the Member State where the customer is resident."

These rules will not be easy to police. The only major online services company to have announced plans to collect the tax is eBay, which announced its plans to do so on June 8.

Meanwhile, the U.S. Direct Marketing Association has been lobbying the E.U. to change the law, with no result.

"The E.U. is setting up a discriminatory price structure against non-E.U. companies," says Robert Wientzen, DMA president and chief executive officer. "The Internet and e-commerce are borderless, they cannot be and should not be weighed down by geographic political controls. Such a broad taxing scheme will act only to limit the growth of e-commerce in the E.U."

"It is extremely burdensome and costly for every non-E.U. Website operator to register and comply with the maze of regulation that the E.U. has established," said Charles Prescott, vice president international business development and government affairs at the DMA.

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