Freedom Lawyers of America

Internet taxes remain in forefront

By Bambi Francisco, CBS.MarketWatch.com
Last Update: 10:41 AM ET Jun 9, 2003
SAN FRANCISCO (CBS.MW) -- In the digital world, U.S.-based Internet companies will soon have to become global tax collectors.

That means higher prices for customers overseas, not to mention a lot of cumbersome compliance.

Starting July 1, companies doing business in European Union member nations will be required to charge customers living in those countries the value-added-tax rate on digital services.

The European Union's regulation requires the collection of VAT taxes on digital services, a broad term that could affect the business of many Internet companies that sell a variety of online goods and services -- music, videos, dating, subscriptions to news sites or even e-learning classes.

"The biggest stumbling block is determining what is a digital service," said Jon Abolins, vice president of tax and government affairs with Taxware. "The valuation should be, 'Am I selling something that can't take any tangible form?' "

If the product or service is reduced to a digital medium, then it's most likely classified a digital service.

This broad definition of digital service may require Internet companies, which heretofore have been able to sell to overseas customers without the burden of collecting taxes from them, to begin implementing a tax-collection process.

For instance, an online school with a British student might be required to collect the VAT tax, said Abolins.

Similarly, USA Interactive (USAI) may have to begin collecting taxes on EU residents who subscribe to the company's Match.com online dating service.

Music services offered by the likes of Apple Computer (AAPL) and RealNetworks (RNWK) fall into the digital services category as well.

And Yahoo (YHOO) will likely have to charge taxes on EU residents that subscribe to its Yahoo Platinum service. AOL Time Warner (AOL) will have to collect taxes on subscribers accessing its CNN video streams.

What about, say, EU residents who book hotel rooms from Hotels.com or airline tickets from Priceline.com (PCLN)? Abolins says that tickets and rooms would not qualify because a customer is receiving an actual product. But the service-processing fee just might fall under the broad interpretation of digital services, he said.

So far, EBay (EBAY) has been one of the few, if not the only, Internet company that's made it clear that it will begin collecting taxes on the brokerage services it provides sellers to EU customers.

But EBay won't be the only one that'll have to comply, said Abolins.

Shares of Internet companies have come under pressure of late partly due to investor concerns about the implications of online taxes.