Intellectual Property Law

Do Non-European Merchants Have to Collect Value Added Taxes?

By Martha L. Arias

Taxation of online sales is one of the most complex and controversial issues regarding e-commerce because they entail intricate domestic or foreign tax rules.  For instance, in the United States online merchants are obliged to collect sales or use taxes depending on the state their server or physical business is located.  Some states do not levy use or sale taxes on online transactions at all; thus, online merchants are not required to collect them.  In the European Union ("EU"), collection of taxes from online sales is a more predictable although similarly complex issue.   This article explains when a non-EU merchant is required to collect value added taxes ("VAT'). 

The Value Added Tax or commonly known VAT is a consumption tax assessed on the value added to goods and services.  VAT is usually assessed on goods or services bought or sold for use or consumption in the Member States of the EU.  Member States may impose, or not impose, different VAT rates to products sold or used within their borders. Currently, EU VAT rates vary between 15% and 25%. 

EU online merchants, as any other merchant, are required to collect VAT on those products sold or used within the EU.  Online merchants collect VAT from their buyers as part of the price and then transfer the VAT value to the tax authority.  Therefore, online merchants are the ultimate responsible for reporting VAT received from their customers. 

Since VAT is a use or consumption tax, non-EU merchants selling to EU residents are required to charge and collect VAT from those transactions.  In other words, an online merchant in the United States ("US") selling products to an EU resident must charge and collect VAT and report it to the respective customer"s home tax authority.  Charging and collecting VAT for products sold to or used by EU residents is a requirement for both EU and foreign merchants, no matter the size or type of business involved.  For this purpose, foreign merchants, including online merchants, must register with the European tax authorities to be able to charge, collect, and remit VAT for their sales.  See the IBLS article titled: EU Special Vat Registration Scheme for Non-EU Business. 

Tax authorities in the EU consider that imposing VAT to products sold by Non-EU merchants is fair practice because it places foreign goods under the same tax standards assigned to EU products.  The 2002 Directive that imposed this requirement on non-EU merchants, noted that physical presence in the EU was not a requirement for the obligation of collecting VAT on goods sold to or used by EU residents.  Further, this EU Directive imposes high penalties to those merchants that violate this rule. Penalties may reach up to 240% of the tax due, and apply to back VAT collections.  

To provide customer assurance, the EU provides ways to verify a VAT number issued by any Member State to an EU or Non-EU merchant.  Buyers who want to make sure sellers, especially online sellers, are trustworthy and legitimate VAT collectors, may go to the European Union Taxation and Custom Union website, enter the VAT number, country issuing the number, and date (see link below). 

Full post as published by IBLS Internet Law Blog on February 26, 2008 (boomark / email).