Commentary

The VAT-Man Cometh?

By Aaron Lukas
August 21, 2000

It seems that ever since 1776, European elites have been grousing about the symbols of American culture that are “forced” upon them. First it was the ideas of our revolution, such as liberty and democracy. Today it’s Hollywood movies, EuroDisney and — horror! — McDonald’s hamburgers. So perhaps it’s no surprise that some European Union politicians seem positively gleeful at the prospect of exporting to the United States that great staple of European life: ubiquitous taxation.

At issue is who will collect the value-added tax (VAT) when a European consumer downloads a digital product or service from a U.S.-based company. The VAT — which can add as much as 25 percent to the cost of a product — is usually charged at the point of entry on “tangible” products shipped from the United States. But since products such as software and music can be delivered directly over the Internet, there aren’t any packages for EU tax collectors to inspect at the border. Thus, when French President Jacques Chirac downloads a game called, say, “Jerry Lewis’ Championship Boxing,” he’s responsible for paying the VAT himself. There’s no practical way to track Chirac’s purchase, however, so the odds of his paying the tax voluntarily are essentially zero.

Ever alert to the scourge of untaxed commerce, EU politicians have hit upon a solution to their problem: have the Americans harvest the loot!

That beggar-thy-neighbor approach to tax collection has been endorsed by the European Commission, which proposed on June 7 that U.S. companies be required to collect a VAT on all sales of digital products to Europe. If the proposal becomes law — which could happen later this year — all U.S. business will have to register with the tax agency of at least one EU member country, ascertain the location and tax status of each and every customer, transmit tax payments electronically to the relevant tax authority, and submit to audits and “due diligence examinations” to make sure no one is cheating. In return for acting as Europe’s tax collectors, American businesses would receive half-price coupons for EuroDisney (just kidding, they wouldn’t get anything).

But as the history-minded among us have noted, America once fought a war to escape burdensome taxes imposed from across the Atlantic. In the days before the Internet, America’s political leaders uniformly denounced “taxation without representation” as an intolerable evil.

Even given today’s less-principled political climate, it’s difficult to see what Washington has to gain by going along with Europe’s scheme. Under the current rules, European consumers have an incentive to shop VAT-free from U.S. companies, which also makes the United States an attractive market for e-commerce investors. European companies rightly complain about that disparity, but too bad: let Europe solve its own tax problems. If political leaders there weren’t reflexively opposed to tax cuts, they could simply exempt digital products and services from the VAT.

Enforcement will be difficult without Washington’s help, but Europe’s tax collectors are determined to try. U.S. businesses with a branch office in Europe, for example, could probably be forced to comply. Another option being considered is “blacking out” the Web sites companies that refuse to register for VAT collection. But consider that despite having highly centralized systems of Internet service provision, authoritarian governments (such as China) have been unable to control access to dissident Web sites. The Internet is simply too massive and decentralized to police effectively.

That enforcement problem is why Europe is calling for increased “international collaboration” on tax collection, meaning that the IRS would monitor U.S. companies’ compliance with EU tax law. And there’s no guarantee that Congress won’t play along: the digital-VAT already has allies among U.S. state and local politicians who would love to see broader taxation of the Internet. After all, if American businesses can be compelled to collect taxes on their sales to foreign consumers, surely those businesses can be told to collect taxes on sales of products destined for other states? Two wrongs, the politicians hope, will in this case make a right.

Ordinary Americans, as they pause this summer to consider the reasons our ancestors took up arms against the British 224 years ago, aren’t going to buy it, and Congress should take heed. “Taxation without representation” remains an intolerable evil that neither time nor technology has diminished.

Aaron Lukas is an analyst at the Cato Institute’s Center for Trade Policy Studies and author of “Tax Bytes: A Primer On the Taxation of Electronic Commerce.