EU ends free Internet tax ride

July 1, a new EU directive goes into effect requiring all Internet companies to account for value added tax, or VAT, on "digital sales."

The law adds a 15 percent to 25 percent levy on select Internet transactions such as software and music downloads, monthly subscriptions to an Internet service provider and on any product purchased through an online auction anywhere in the 15-member bloc of nations.

The VAT is nothing new for some Net companies. European dot-coms have been charging customers VAT since their inception. Their overseas rivals, though, have been exempt, making foreign companies an obvious choice for the bargain-hunting consumer.

"It's a massive competitive disadvantage. It's good to see at last it being eroded," said David Melville, general counsel of U.K. ISP Freeserve, a division of French ISP Wanadoo.

Freeserve has lobbied furiously for the past two years to get the loophole closed, saying its chief rival, AOL U.K., the Internet unit of AOL Time Warner, saved $249.7 million in tax payments over the years.
AOL Europe has relocated its continental headquarters to tiny Luxembourg, one of the EU's cheaper tax regimes.

Seattle-based retailer Amazon.com said the new tax regime will affect its auctions, plus marketplace and zShops operations where third-party new and used items are sold.

In addition, VAT will now be charged on software downloads and the sale of e-books, Amazon said.

"We'll go out shortly to our seller community about how these changes will impact fees we currently charge," Amazon spokeswoman Patricia Smith said.

Online auctioneer eBay will swallow the VAT charge on behalf of consumers in a host of its smaller European operations such as France and Italy. But in the United Kingdom and Germany, its largest and most profitable European units, the company has raised fees to reflect the higher VAT charges.…
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