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Committee on Energy and Commerce

U. S. House of Representatives
Committee on Energy and Commerce
Washington, DC 20515-6115

W.J. "Billy" Tauzin, Louisiana,


July 25, 2002

The Honorable Paul H. O'Neill
U.S. Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220

The Honorable Donald L. Evans
U.S. Department of Commerce
1401 Constitution Avenue, NW
Washington, D.C. 20230

The Honorable Robert B. Zoellick
Office of the United States Trade Representative
600 17th Street, N.W.
Washington, DC 20508

Dear Gentlemen:

The House Energy and Commerce Committee's Subcommittee on Commerce, Trade and Consumer Protection has been examining the domestic regulatory treatment of digitally delivered goods and services and conducting an extensive review of barriers preventing growth of electronic commerce globally. The Committee has held a number of hearings to examine efforts by foreign governing bodies, including the European Union and the Council of Europe, to either impose additional restrictions on electronic commerce or sweep it within existing ill-fitted regulatory regimes. This process has highlighted the radically different approaches toward the governance of electronic commerce taken by the United States and other governments.

As you are well aware, less than one year remains before July 1, 2003 deadline when the European Union (EU) will require the imposition of value-added tax (VAT) on sales of certain electronic commerce goods and services (EU VAT Directive). The changes made by the Directive, and related regulations, raise gave concerns that additional barriers are being imposed on electronic commerce. The EU VAT Directive also raises a host of practical problems and concerns. Most important among these concerns is whether American companies, the leading producers of electronic commerce goods and services in the world today, would be held to a different and potentially discriminatory standard than their European counterparts. As currently drafted, it is extremely likely that under certain circumstances, non-EU companies, including American companies, will be forced to charge a higher VAT rate on their goods and services to European customers than European companies will be required to charge for identical services and goods to the same customers. This is grossly unfair and could distort the marketplace for digitally delivered goods and services.

Furthermore, the EU VAT proposal raises a fundamental issue that needs to be addressed: whether digitally delivered goods and services should be treated the same as or different than non-digitally delivered goods and services. The EU proposal raises the possibility that the VAT rate applied to digitally delivered goods and services would be much higher than one imposed on the same goods and services when delivered physically. This is a logically unsound principal, as our examination suggests that the treatment of digitally delivered goods and services should be taxed at rates no greater than the same goods and services when delivered physically or perhaps should not be taxed at all.

Moreover, the administrative burdens imposed on non-European Union companies by the Directive would exceed those imposed on European companies offering identical digitally delivered goods and services. For instance, non-European Union companies would be required to develop and utilize methods to verify the location of their end customers - a process that cannot be accomplished with currently available technology. This is an expensive and potentially crippling addition to the business operations for suppliers of digitally delivered goods and services of non-EU companies. Other potentially expensive and onerous administrative issues needing clarification or refinement include: the potential for audits by multiple Member States of the EU; an undeclared minimum threshold level for application; and the possibility for multiple points of contact for differing aspects of compliance. Equally troubling is the lack of any commitment by EU member states to implement or enforce the directive uniformly, thus subjecting non-European companies to further divergent treatment and confusion. While some refinements and clarifications were made to the Directive as a means to reduce burdens on foreign imports of digitally delivered goods and services, these concessions were both too little and too late.

We command the strong leadership of the Administration, specifically the comments of Deputy Treasury Secretary Kenneth Dam earlier this year and the work of the Internal Revenue Service, on this important topic. It is significant that similar concerns were raised by Secretary Dam's predecessor in the last Administration, Stuart Eizenstat, demonstrating the bi-partisan basis for our concerns. We also recognize that this issue has been raised in meetings with EU Commissioner for Internal Markets and Taxation Frits Bolkestein. However, much work remains, as the EU seems poised to continue forward undeterred in addressing unresolved implementation problems that will only effect non-EU suppliers of digital products and services as was amplified by recent public comments by Mr. Bolkestein. The Administration is in a position of strength on this issue, as its views are both correct and timely. We urge the Administration to take all necessary and appropriate means to address the inequalities embodied in the EU VAT Directive as it pertains to foreign suppliers of digitally delivered goods and services, especially American companies. This action should include all relevant efforts, including consideration of US WTO rights to properly refine or overturn the EU VAT Directive.

It should be known that we support and expect a continued strong stance by the Administration to address these issues in the future. The fundamental concerns raised by the EU VAT Directive cannot be negotiated or pushed away in an attempt to mitigate possible poor relations between the EU and the United States, but instead must be addressed squarely on the merits.

Lastly, it should be noted that the Committee may deem it necessary to hold additional hearings on this subject. We look forward to the Administration's participation and assistance in preparing for any additional hearings. We also look forward to building a strong working relationship with each of you in order to ensure electronic commerce can grow to its full potential - both domestically and internationally.


/s/Cliff Stearns /s/Edolphus Towns

/s/Rick Boucher /s/Nathan Deal

/s/Lee Terry /s/John Shimkus

/s/Charles Bass /s/Greg Walden

/s/Bart Gordon


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