(CN) - France and Luxembourg ran afoul of EU tax laws by charging reduced VAT rates on digital books, Europe's highest court ruled Thursday.
The European Commission sued the two nations after both began charging lower VAT rates on e-books than they do on printed paper books in 2012. The VAT - value-added tax - is the EU-wide equivalent to a sales tax and is charged on most goods and services throughout the continent.
France applied a 5.5 percent VAT rate on e-books, while Luxembourg - home to e-book giant Amazon's European headquarters - has been charging just 3 percent. France's normal VAT rate is 20 percent and Luxembourg's runs 17 percent.
But the schemes violate the EU's VAT directive, the European Court of Justice ruled in a pair of decisions issued Thursday. While the Luxembourg-based court acknowledged that the law allows for reduced VAT rates on books, it expressly excludes "electronically supplied services," the court said.
Furthermore, the VAT law states that reduced rates can only be applied to the "supply of books on all means of physical support." In the case of e-books, the physical support is the computer or tablet they're read on and - since they can't be read without a device - a reduced VAT rate does not apply, the court said.
The court agreed with France that EU lawmakers had intended that goods with cultural or social objectives - like books - should have a reduced VAT rate. But it noted that the legislature also expressly excluded electronic services from the list of reduced-VAT items.
As for Luxembourg, which the commission criticized for its super-reduced 3 percent VAT rate on e-books, the court acknowledged that EU law allows member states to impose VATs below the 5-percent threshold as long as the goods affected are on the list approved by EU lawmakers.
But since e-books - and all electronically supplied services - have been excluded from the low-VAT list, Luxembourg must raise its rates to comply with the law, the court concluded.
Both France and Luxembourg said they would comply with the court's decision, but urged European lawmakers to overhaul VAT rules to put e-books and paper books on the same footing.
"Luxembourg is of the opinion that consumers should be able to buy a book with the same VAT rate, be it online or in bookstores," the nation's finance ministry said in a statement. "We will continue to advocate for adapting the EU legal framework to technological advancement."
The commission - Europe's regulatory and administrative body - indicated that an "extensive overhaul" of the VAT system would be rolled out as early as next year, and could include allowing paper and electronic books to be taxed at the same rate.
"The commission appreciates that member states may want to define their own priorities, including on culture policy, in their taxation policy. This should be done within the EU legal framework," the commission said in a statement.
Amazon stopped charging the 3-percent VAT on electronic book sales in the EU earlier this year, and now charges the tax based on a customer's location.
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