A world of difference: how the EU and US tax e-commerceMarch 15, 2013
Despite recent economic difficulties, the European Union (EU) and the United States (US) remain two of the world’s most important consumer markets, with a combined population of more than 800 million people. In the past, selling goods and services to these consumers generally required a physical presence or local representative, but the internet has changed that landscape forever.
With more goods and services being sold to private consumers by remote sellers, who may be based anywhere in the world, tax administrations are challenged with the tasks of keeping pace with technological change and protecting precious revenue receipts.
How do the EU and the US compare?
The basic principle of EU VAT is that it is a tax on consumption. Sales and use taxes, as applied in the US, are in principle no different, although the mechanics of collecting them are quite different.
EU member countries may require that if consumption occurs within their borders, then VAT should be properly allocable there. For that to occur on a uniform basis, all the EU countries must agree on the mechanics of doing so.
In the US, adoption of a uniform national standard would in theory be much simpler, since only a mere majority of Congress and approval by the President would be required. Yet Congress has done little to establish uniform national standards, leaving states and taxpayers with a series of US Supreme Court decisions establishing outside limitations on the ability of states to enforce collection of their consumption-based taxes.
The European Union approach
Summary of the EU VAT rules
- A business within the EU that sells and delivers goods to private individuals in the EU should collect and remit VAT in its customers’ EU countries subject to certain thresholds. There currently is no single point of registration scheme for such sales, and businesses operating in the EU may have multiple VAT registration and remittance procedures to follow.
- A business that sells and delivers goods from outside the EU may not have such requirements, but customers resident in the EU are required to pay VAT on imports of such goods, subject to certain low-value thresholds and if they are declared as importers of record.
- A business established in the EU that sells ESS to private individuals is required to collect and remit VAT in the EU country where the business supplier is established. However, from 2015, it will be required to collect and remit VAT in the EU country where the private individual buying the ESS is resident.
- A business established outside of the EU is required to collect and remit VAT on sales of ESS to private individuals resident in the EU, charging VAT at the rate in the EU country where the customer is resident. VAT on sales of ESS to private individuals resident in the EU can be reported and remitted through the single point of registration regime.
- Similar rules apply in Iceland, Norway and Switzerland. A business established outside of these countries is required to collect and remit VAT in each if it supplies ESS to private individuals resident in these countries.
Sales and use taxes in the US
The US is the only OECD member country that does not impose a VAT. Also, the US does not impose a general national consumption-based tax. Instead, state and local taxing jurisdictions impose sales and use taxes.
Largely confined to the taxation of retail sales of physical goods, these taxes are designed not to apply to intermediate transactions (i.e., from manufacturer to wholesaler and retailer) as VAT does, but only to retail sales to the end consumer.
Sales and use taxes are imposed by 45 of the 50 US states and the District of Columbia. Unlike the EU, harmonized, uniform standards on the application of these taxes do not exist, and, subject to the limitations established under the US Constitution, each state administers its sales tax independently. Items subject to tax in one jurisdiction may be excluded in others.
Although a few states permit sales and use taxes to be imposed only at the state level, a large majority allow local jurisdictions to impose rates in addition to the state rates. However, in most of these jurisdictions, collection and enforcement is delegated to a single state authority, and the rules applicable to transactions subject to the tax are uniform throughout the state.
Thus, while application of the tax is the same throughout these states, the rates may vary depending upon the specific jurisdiction to which the transaction subject to tax is sourced. Although just 46 state-level jurisdictions impose a sales tax, when localities are considered, there are more than 7,600 taxing jurisdictions throughout the US. As such, administering sales tax on a multistate basis is a daunting task.
In general, the EU seems to have developed more effective ways of taxing e-commerce consumption. An important element of the EU system is that it allows the 27 member states to collect VAT on most consumption by private individuals if it occurs within their borders, regardless of whether the sellers of the goods and services have any physical connection to that particular member state.
In most cases, cross-border transactions are taxed in the same way as domestic transactions, which reduces revenue shortfalls and distortions of competition. By contrast, the US state and local sales and use tax rules seem mired in the past when trade was localized and limited.
As there is no federal sales tax, cross-border trade in this context not only includes international transactions, it also applies to interstate deliveries. As a result, as business-to-consumer commerce moves increasingly toward a “remote seller” model, US state and local governments continue to lose tax revenue.
Meanwhile, sellers are faced with an enormously complex system of US state and local sales tax reporting, collection and jurisdictional rules. Taken together, the more modern approach of the EU arguably inflicts less suffering on the business community and may offer some interesting possibilities for addressing the problems that affect tax administrations.
The full version of this article was first published in the Ernst & Young Indirect Tax Briefing, Issue 6, December 2012 (pdf, 4.96 MB)
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