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German Transaction Tax on Internet Software Sales into Germany?
by Clemens Kochinke, Berliner, Corcoran & Rowe, LLP, Washington, DC

Standard software, when transmitted via modem or made available for download via the Internet to a commercial user in Germany, can be subject to the German and European Communities transaction tax ("Umsatzsteuer"), the German tax agency in Koblenz has advised its tax examiners to determine. The Koblenz agency will reevaluate the law in the event that the European Union should produce a common rule on the treatment of such sales for the European Union's value added tax which would also be binding in Germany.

The advisory could constitute a significant headache for United States software vendors who have commercial customers in Germany and make standard software available to such customers via the internet. The advisory appears to run counter to common sense in that the transaction appears to occur, in the above scenario, in the United States where the software vendor, and presumably the internet server with the software on it, is located.*/ The Koblenz agency argues, however, that the taxable transaction occurs at the customer location where the software is utilized.

As a result, the advisory requires German companies to segregate software sales by customer countries. If the customer is located outside of the Germany or the European Union, the transaction tax does not apply. Conversely, the transaction tax would apply to transactions with a customer in Germany or the European Union.

A glaring omission appears to be the lack of guidance for foreign vendors who offer their software to German commercial customers via modem or internet download.

The answer may be deduced through a careful analsyis of the German transaction tax statute ("Umsatzsteuergesetz" of April, 27 1993, as amended). Generally, section 3a determines the taxable event to occur at the business location of the vendor. Subsection 3 of section 3(a) contains a special rule for commercial customers and states that the taxable event in such cases occurs at the customer's business location.

The Koblenz agency also notes that the advisory applies to standard software, presumably as opposed to custom software. It clarifies that reduced tax rates do not apply to modem or internet transactions of standard software; this issue had been unclear because certain sales of material involving copyrights qualify for the rate reduction. The type of sale in section 3a IV(5) of the transaction tax statute which the advisory points to deals with "transactions involving information including business processes and experience". The agency's interpretation appears to push the envelope.

For the text of the advisory, see OFD Koblenz, Vfg. vom 22.6.1998 - S 7100 A - St 512, republished in 44 Recht der Internationalen Wirtschaft 648 (August, 1998).


* Download transactions involve a customer contacting the server computer that holds the vendor's software offering, a customer request being sent to the vendor's server for the release of the software to the internet, a a server response releasing the software to the internet, and the customer standing ready to accept the software as it leaves the bounds of the vendor's server. Like a vending machine sale, the taxable transaction appears, from technical and common sense perspectives, to occur at the vending machine (or software server), and not where the customer ultimately consumes the goods (or uses the software).