International
Internet Sales
As
regards international transactions, the existing
rules are clear about sales of physical products
delivered in the United States: if the seller
is in a country with which the United States has
a double tax treaty (almost all high-tax countries)
then there is no sales tax unless the company
has a "permanent establishment" in the
United States; for other countries (including
almost all offshore jurisdictions) products are
taxed on arrival if the sale is "effectively
connected with the conduct of a US trade or business".
There
is little certainty about the effect of current
US legislation on the taxation of sales made from
non-US web-sites. Some indications given here
are not definitive answers, and any trader should
seek professional advice relevant to their own
particular situation.
The
location of the server in or on or with which
a contract was concluded has an uncertain impact
on taxability. It is thought unlikely that a server
based in the US constitutes a 'permanent establishment',
but sellers are well-advised to avoid such if
possible. Even if the server is not a problem,
the server's host might be an 'agent', who can
be deemed a 'permanent establishment'. A host
who also provided transaction-processing, support
and marketing functions would probably cross the
line into being a permanent establishment, especially
if the host does not have many clients.
It
is also unlikely that the positioning of a server
in an offshore jurisdiction by a 'treaty' country
business would change the origin of the sale,
but no-one knows for sure. By the same token,
it is unlikely that an offshore (non-treaty) company
could avoid taxability by using a server in a
high-tax (treaty) country.
So
for physical products, the conclusion seems to
be that e-commerce doesn't really change much,
unless a company moves from a treaty to a non-treaty
country. Usually this would happen in order to
gain corporation tax benefit and that benefit
would have to be set against the taxability of
US B2B sales.
For
digital products other than software there is
the additional difficulty that it is not clear
what is being sold. The rules for software say
that it is delivered where it is downloaded, and
taxed accordingly, as if it was a physical product
(see above). Other types of download may be treated
equivalently to software, but may instead be treated
as generating royalty income, which would be taxable
regardless of whether or not there is a permanent
establishment in the US. There are, at the time
of writing, no rules. The normal rate of tax (to
be withheld by the US buyer) would be 30% on royalties,
which could be partly reclaimed by the seller
if in a treaty jurisdiction. But it seems most
improbable that a private buyer of, say, recorded
music in the US is going to deduct and remit tax
on purchases from a remote vendor, and only slightly
less improbable that a business would do it unless
they are buying on a large and noticeable scale.
The
problem for a business selling downloadable product
into the US, and not needing to allow for tax
as things stand, is evidently that retrospective
legislation may make it liable for large amounts
of tax on past transactions. Businesses will have
to make their own decisions about what to do.
For a small business with occasional US sales,
the danger can probably be disregarded, but for
a larger business with a substantial Internet
trade in the EU, there is a real chance that the
IRS will come after them one day.
The
Washington State Department of Revenue announced
in July, 2009 that all retailers must charge sales
tax for online digital products and services.
The Department issued a further statement in June,
2010 to clarify ambiguities and 'correct unintended
consequences'. It announced that Data Processing
Services, live interactive presentations, advertising
services and web hosting, storage and backup are
exempt from sales tax. This ruling was to apply
retroactively from July 26, 2009.
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