ECW16
Office Futures

ECW16
 Issue 16
6 December, 2001




We're back.

In the twelve months or so since we last published ECW, countless e-commerce balloons have been deflated and some hard lessons learned. Electronic commerce is far from dead but it is no longer a stock market darling. This has had the useful effect of making it a less attractive target for shysters and less of a magnet for Walter Mittys.

The flip side is that big business, and its friends and hirelings in government, has been quietly working to make the Internet more its kind of place. This is not all bad news -- we'd all like to make on-line payments securely, for instance, or have the assurance of dealing with famous brand names -- but it comes at a growing social cost. Business is not famous for its regard for matters like freedom of speech, personal privacy, ethical selling or looking out for minorities. These are inconveniences at best; at worst, their proponents are seen as outright enemies.

Anyone reading back-issues of ECW will get a good idea of where we stand on these matters. There will be more of the same. In the next issue, for instance, we glance at how the British and American governments are exploiting the opportunities created by the events of 11 September to pass spook-friendly and, mainly, business-friendly legislation.

Political and social issues will not be monopolizing ECW's content, you may be relieved to hear. Commercial, structural and, to an extent, technical aspects will also feature strongly. For instance, this issue consists of an item on on-line tax and payments. I hope you enjoy it.

This issue also sets the pattern for the future -- shorter editions but more of them.

Your views on ECW are always welcome. Contributions are even more so.

Best wishes,

Roger Whitehead

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 VAT and the Internet [top of the page]

This article is based on original material supplied by David Jones of the Ford-Peacock Consultancy, which can be contacted at +44 (0)1295 722213 or http://www.ford-peacock.com. Thanks go to him.

The early vision of the Internet as a zone free from government interference, control and tax has not lasted long. Regulators and taxmen have all drawn a bead on it, especially those from western governments. Naturally, they have not got it right first time, however one defines “right”, and anomalies remain. One result is that the Internet is making Value Added Tax more, not less, complex. Simplification is on the way, so this article says.

Digitised sales
E-commerce transactions that involve the physical delivery of goods and services are subject to the same cross-border VAT rules as ordinary purchases. Whether VAT applies to such a sale depends mainly on four “where” questions:
where the buyer is,
where the seller is,
where the goods travel from, and
where the buyer intends to use or consume them.

For instance, VAT applies if buyer and seller are both in the United Kingdom, the goods originate here and they are consumed here.

The electronic delivery of products, such as music, is governed by more complex rules. These can be inconsistent and anomalous, as these three cases show:

1. Digital sales to individuals within the EU by companies based in the EU attract VAT at the rate applying in the supplier's country. This can be useful to the supplier if its VAT rate is lower than that levied in the customer's country. This is especially so for suppliers based in Luxembourg, which has the lowest VAT rate in Europe.

2. Some digital sales to individuals outside the EU by companies based in the EU may also attract VAT at the seller's local rate. This can be less helpful. For example, the sale of a digital novel by a UK seller to a non-EU buyer would require the seller to collect VAT from that customer. This places some EU-based companies at a competitive disadvantage.

3. Digital sales to individuals within the EU by companies based outside the EU do not currently attract VAT. This gives non-EU companies a competitive advantage over EU suppliers.

And, finally, some digitised products attract VAT, whereas the equivalent physical product might not. Books in the UK are an example. This rule penalises sellers of electronic publications.

Global agreement?
Both the EU and Organization for Economic Co-operation and Development (OECD) would like VAT for digitised products and services levied at the place of use or consumption. This would require EU suppliers to charge VAT at the consumer's domestic rate. Suppliers from outside would need to register and account for any EU VAT resulting from sales to EU individuals.

It remains unclear whether sellers outside the EU would need to register in one or all the EU member states they supply. It also not clear whether, if they do register in one state, whether their VAT income from digitised sales would be redistributed throughout the EU. This would offset the effect of the multiple standard national VAT rates that apply.

The debate is at stalemate. Britain has rejected a Swedish proposal to set up a single place of registration for non-EU suppliers. Instead, it is calling for a moratorium on Internet taxation. In this, all digitised products would be zero-rated and therefore tax neutral.

This may provide further impetus to a search for a global solution, which will become more urgent as the volume and value of digitised transactions increase. Technical advances are making digitised 'goods' more commonplace and, at the same time, more complicated.

Third-generation mobile services will lead to more downloads and to a change in the nature of those downloads. Subscription-based sales of tangible goods will become possible, with the working or saleable life of those goods extensible through digital downloads. For example, buying a music CD might entitle a customer to listen to it for only a limited time. After that, he or she can go on-line to buy, say, a software key to allow further listening.

A possible solution
Similar complexities are found in the USA. As the National Governors Association [1] asks on its Web site: “Is orange juice a fruit or a beverage?” The answer is of pressing concern (sorry) to American fruit juice producers. One state might define it as a fruit, and tax it, but a neighbouring state might regard it as a drink, and therefore not tax it. These sorts of inconsistency abound across America's 7,500 different taxing jurisdictions. The EU's problems look small in comparison.

To tackle these problems, 39 US states have collaborated in setting up the Streamlined Sales Tax Project (SSTP). Its aims are to create uniform definitions (as with orange juice), build them into tax bases, simplify audit and administration, and use the Internet and computers to cut the costs of tax collection. Nobody knows what these costs are, exactly, but everyone -- government, tax experts, industry and consumers -- is certain they are too high. They're probably right, but part of the project is to measure these costs.

The project is at pilot stage and is testing the feasibility of using a software-based system to calculate and remit taxes. This should make life easier for merchants and retailers. If it succeeds, merchants would no longer have to register with individual states. The software would also keep traders up to date with tax rates and laws and file their returns. Its records would be admissible in audits.

It works like this:
The system supplier (Certified Service Provider, in SSTP parlance) keeps an up-to-date databases of state tax policies and rates.
When making a sale, the retailer's point-of-sale system polls the database. This automatically calculates the precise tax to be levied, returning the result to the seller's system computer so it can work out the final bill.
When payment is verified, the seller's system sends the appropriate amount of tax to the Certified Service Provider, who remits it to the appropriate state.

Tax experts on this side of the Atlantic are evaluating SSTP's potential for application here. Erik R. Olbeter wrote about the need for it in Internet/Ecommerce Bulletin, February 2000 [2]: “Foreign country VATs apply to both business-to-consumer and business-to-business sales, meaning that all B2B transactions require tax processing… the future of tax transaction processing lies in the Internet, and companies with a lead in e-commerce sales transaction processing [3] will likely be well positioned to serve as broad transaction processors for on-line and brick and mortar merchants”.

There's more about the Streamlined Sales Tax Project on its official Web site, at http://www.geocities.com/streamlined2000. This is an astonishingly cheap-looking effort -- and on a free hosting service. There is a livelier presentation of the facts about the project here: http://www.ecommercetax.com/SSTP.htm.

Notes
[1] National Governors Association (see http://www.nga.org) has been the collective voice of state governors since early last century. It raises the orange juice question here: http://www.nga.org/nga/salestax/1,1169,,00.html .

[2] Internet/Ecommerce Bulletin is published by Schwab Washington Research Group, part of Charles Schwab. Erik Olbeter is its editor. You can get the issue quoted from above from here: http://www.esalestax.com/ecomm.pdf.

[3] One of the companies “with a lead in e-commerce sales transaction processing” is Taxware. It can be unmasked as the supplier of the tax system described above (and is a client of Ford-Peacock). See http://www.taxware.com/index.html for details.


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 About eComWatch [top of the page]
eComWatch is edited and published by Roger Whitehead and Christopher Ogg. Copyright Roger Whitehead and Christopher Ogg, 2002. eComWatch may be circulated freely in its original format with copyright notice intact. For permission to reproduce any article,