EU puts VAT on the European customers

Until July 1, 2003, companies that sold online-only products (such as digital downloads or subscription services) to European customers paid no VAT (Value Added Tax). According to an article on Wired, that's going to change after the first.

To create a level playing field for companies in the EU (who were always required to collect the tax), the EU has decided that they will charge even foreign companies for selling to their customers, even if their operations weren't in the EU.

This is perhaps a predictor of what the states in the US are going to do if they get a chance. For years, now, states in the US have complained (along with brick and mortar retailers based in those states) that they are losing revenue to tax-free sellers on the Internet. Work has recently been done to create a tax exchange mechanism that would make it more "reasonable" for businesses working online to pay taxes to the various jurisdictions, but it could create a huge problem on the accounting side of sales at any company selling online if the states get their way.

The difficulty is that for each territory or state that you pay taxes to, you need to fill out paperwork, maintain separate records, and deal with setting up appropriate tax accounts (and, in some cases, register as a "foreign corporation"). Considering that each jurisdiction may have its own reporting requirements and mechanisms, you might end up with a full time job just trying to file things correctly. Add to that the difficulty of determining where a customer is coming from and you have a logistical nightmare.

Of course, the accounting firms and consultants who will "volunteer" to help you though this quagmire love the idea :-).