US industry group white paper says geolocation technologies are not precise enough to identify taxing jurisdiction reliably, rendering EU VAT rules unworkable

October 29, 2002

Arlington, VA, 15 October 2002

A new paper released today by the Information Technology Association of America (ITAA) finds that geolocation software, used to identify location of e-commerce customers, does not provide accurate enough location information for the purpose of consumption taxation.

The ITAA white paper, "E-Commerce Taxation and the Limitations of Geolocation Tools," examines the current capabilities of geolocation software and identifies a number of obstacles that render the tools inaccurate. The paper concludes that current IP addressing, plus future dynamic IP addressing enabled by IPv6, corporate networks, anonymizers, and large ISPs with millions of users, are all factors contributing to the limited accuracy of current geolocation technologies for consumption taxes.

"The EU VAT rules that will go into effect next year place an unmanageable burden on geolocation software products. Our report finds that geolocation software does not resolve any of the concerns about being able to independently identify the correct taxing jurisdiction," said ITAA President Harris N. Miller. "It is inappropriate for governments to mandate the use of these tools for taxing or for any other purposes."

Full text of white paper

For More Information Contact: Tinabeth Burton (703) 284-5305 tburton@itaa.org

ECOMMERCE TAXATION AND THE LIMITATIONS OF GEOLOCATION TOOLS

Introduction

New European Union (EU) value added tax (VAT) rules that will go into effect on July 1, 2003 will require non-EU vendors that sell certain electronically supplied goods and services to EU consumers to charge VAT based on where their customers are resident.

The OECD, in its paper titled 'Tax Treaty Characterization Issues Arising from Electronic Commerce', concluded that most types of e-commerce transactions were sales. This laid the foundation for the EU subsequently asserting that VAT should be imposed on such transactions based on the residence of the consumer. By concluding that most digital transactions are sales, rather than licenses or services, the geographic incidence of the EU VAT shifts from the location of the seller (which would remove non-EU sellers from the burden of collecting and remitting VAT on sales to EU customers) to the residence of the consumer, thus forcing non-EU vendors to collect and remit EU VAT on e-commerce sales to EU-resident customers.

Once these new rules go into effect, non-EU vendors selling electronically supplied goods and services to EU consumers will be required to determine and charge VAT based on a customer's country of residence.

Absent any technological tools that are capable of providing accurate information regarding a customer's place of residence on a real-time basis, non-EU vendors must be allowed to rely on customer provided information in determining country of residence.

Geolocation technology, a fairly recent innovation, purports to be able to address some, if not all, of the challenges...

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