As in life, the only things certain in Internet business are death and taxes - unless you're America Online. For years, the world's largest ISP has quietly avoided paying the value-added tax, or VAT, imposed on companies operating in the U.K. This amounts to a 17.5 percent boost to the company's margins, saving AOL an estimated $30 million a year.
Not for much longer. Last month, Freeserve, the U.K.'s largest Internet access provider, began painting AOL as a tax freeloader, first in an official complaint to the British government and then in a series of blistering advertisements.
In 1997, the U.K.'s Customs and Excise office issued a waiver for AOL, exempting it from paying VAT on its Internet service, on the dubious grounds that the company offered content rather than telecommunications services.
"I can't think of any other company that is getting that kind of advantage over U.K. companies," fumes Freeserve CEO John Pluthero. Freeserve gave the government an ultimatum: Level the tax playing field, or we'll move out of the country.
It seems to have worked. A Customs and Excise spokesman admitted last week that AOL's exemption was "outdated" and would be changed as Britain tries to bring its VAT enforcement into line with other EU nations. What the spokesman didn't say is that the government is constantly pressuring the EU to waive VAT on digital products delivered over the Net. That battle is unlikely to be resolved anytime soon.
