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Silicon Alley Chokes on Proposed European Tax

As you sat around this Fourth of July nursing a Sam Adams, history was getting ready to repeat itself. The European Union may soon slap its sizable value-added tax onto all e-commerce transactions originating outside its borders, subjecting companies in places like Silicon Alley to taxation without representation. This, says Grover Norquist, president of Americans for Tax Reform, could mean war.

"The EU has no jurisdiction over foreign businesses selling digital goods online to European customers," Norquist says. "It's an attempt by Europe to export their outsize tax burdens to others—namely Americans."

Under the plan, foreign vendors would collect the tax and then submit to regular audits by EU-appointed inspectors. Bob Matsuoka, cofounder and president of Sohonet, a New York-based software company, says this proposal would likely keep many software companies from expanding into Europe. "Audits are very expensive for small businesses," he says. "If we are going to go through the hassle of collecting taxes for European governments, and get absolutely nothing in return besides the ability to sell in Europe, which we already have under international trade agreements, then we'll just avoid the market entirely."


Europe is 'afraid of e-commerce cutting into their tax revenue, but that's Europe's problem. We aren't going to assume their tax procedures for them—why should we?'


Which may not be far from the EU's ultimate goal—a European market relatively free from the specter of cheaper, more efficient competition overseas. The European Commission, a body of 20 appointed officials that proposes policies for the EU's 15 member nations, argues in a June report that the only way to give European companies a fighting chance is to force outside businesses to tax European buyers for each piece of software, entertainment, or information they buy on the Internet. EU tax "rules were never designed to meet the needs of e-commerce," says the analysis, and the result is that EU businesses are at a disadvantage.

If the commission has its way, Americans offering software online to Europeans will have to tack a value-added tax onto digital sales, while EU companies can scuttle the VAT when selling to Americans. "It's outrageous," Norquist says. "Leveling the playing field does not mean forcing foreign companies down to your level. If Europe wants to compete on the world market, they're going to have to accept some change and transition in their outmoded methods of tax theory. Otherwise, they're going to cease to be a competitive player."

The VAT, which ranges from 15 to 25 percent of a product's price, has become a primary source of revenue for European governments. Currently, the VAT is applied to all tangible goods sold within EU borders and is added to most tangibles from overseas. The bête noire of the EU is any digital service sold directly to individuals through computers, since the EU can't track—or tax—such purchases.

According to the commission's proposal, foreign companies that annually sell more than $95,000 worth of digital services to EU consumers would have to pick one European country and establish a "point of registration" there. Marika Lautso, a spokesperson for the EC, says each EU member would be responsible for auditing the sales of foreign companies registered within its borders. Lautso adds ominously, "There will be a certain amountof cross-monitoring of consumers and business records."

All this adds up to a logistical and financial nightmare for non-EU Internet businesses, 80 percent of which are currently based in the United States. Hobbling them would give Europe time to grow its own Web businesses and lock in a stable consumer base until the EU is truly ready to compete globally. "This is the opening salvo in what is sure to be a long debate about trade relations," says Aaron Lukas, an analyst at the Cato Institute in Washington, D.C. Lukas says Congress has adopted a wait-and-see attitude, but he expects the topic to pick up steam after the fall elections. Regardless of who comes into power, Lukas is convinced the United States will never willingly follow the commission's proposal. "Europe's afraid of the future and they are afraid of e-commerce cutting into their VAT tax revenue, but that's Europe's problem. We aren't going to assume their tax procedures for them—why should we? We have no representation in the EU and derive no benefit from their VAT taxes.

"As a matter of fact," Lukas adds, with a chuckle, "didn't we have a tea party with the British over a very similar subject about 300 years ago?"


Additional research: Shelley E. Molina

 
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