http://www.nytimes.com/library/tech/00/03/biztech/articles/02tax.html
FRANKFURT, March 1 -- Testing the ability to enforce national tax laws in cyberspace, the European Commission is planning to collect sales taxes on music and software delivered over the World Wide Web.
Though not yet complete, the proposals would eliminate what European officials view as a big loophole that benefits American companies.
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Under proposals developed by the European Commission in Brussels, companies would have to collect what is known as a value-added tax, a type of sales tax, on products they sell and distribute over the Internet.
At issue are products like computer software, music and videos that can be turned into digital code and downloaded by customers anywhere.
Value-added taxes are a major source of revenue for most European governments, and tax rates vary by country from about 12 percent to more than 20 percent.
When it comes to physical goods, like books or clothes, the taxes have been collected by stores and mail-order companies or by customs officials if the products were to be shipped across national boundaries.
In those transactions, the tax rate is based on the rate of the country where the product originated.
But "virtual" products defy that system, because they can be sent just as easily from the United States or an off-shore tax haven like the Cayman Islands as they can from a local store in France.
European officials say that this gives American software companies an unfair advantage over European competitors. They are also worried that online vendors of all types will shift growing volumes of sales from sources outside the European system for tax collection.
Under proposals that officials are debating in Brussels, products sold in digital form would be taxed based on the rate in the customer's country, meaning that companies operating in the United States would have to collect the taxes on all sales to European customers.
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/ dave /