From the January 2003 issue of Entrepreneur

You knew it was coming. Internet taxation can't be avoided forever. The European Union (EU) is putting into effect a law that requires collecting taxes on the exchange of digital goods like software and music downloads. If you own a U.S. business in this field and sell abroad, you will have to collect the Value Added Tax (VAT) based on where the buyer is physically located. And you have until July 2003 to get ready.

The VAT varies by country, topping out at 25 percent in Sweden and Denmark. Collecting those taxes means registering with a member state of the EU and upgrading your e-commerce system to handle the new demands. Another option is to simply get out of the European market. Keep in mind, though, that the new policy only applies to businesses with at least 100,000 Euros in annual sales.

Proponents say the new policy levels the playing field for EU businesses, which are already required to collect the VAT. Opponents, the U.S. government for one, feel compliance will be too heavy a burden.

No provisions have been made for enforcement, and many analysts expect administration to be difficult and some businesses to simply ignore the new rules. The implications of the new law could be far-reaching. One possibility is that a tangle of hodgepodge tax laws could be applied to the Internet by various nations before a more global plan can be hashed out. Visit Taxation and Customs Union for more information and the complete text of the directive.