The quick background is this: Effective 1 January 2015, the European Union ("EU") will require all sellers of digital media to include Value Added Tax ("VAT") in the listed prices of the item being sold, to collect the VAT from the buyer, and to remit the VAT collected to the appropriate authority. This requirement has been public knowledge for at least six months as of this date (18 December 2014) and some sellers of digital media have taken steps to comply. Others have not. Others are trying to but cannot. There appears to be a huge amount of misinformation, misunderstanding, ignorance, and, well, a lot of other stuff.
I don't have all the answers, and don't claim to. I'm just trying to ask the questions and put whatever information I find into some coherent order.
The concept of VAT has been around for quite a while. It functions as a national sales tax for some 28 European countries, and ranges from a low of 3% to a high of 27%. Much like state, county, and local sales taxes in the U.S., VAT is imposed on the buyer of physical merchandise at the time of purchase. The merchant collects the tax at the rate imposed on the location where the purchase is made and then remits the monies to the appropriate authorities. The purchaser may be from another country (or state, county, or city) where the rate is different -- higher or lower -- but the rate is charged based on where the actual transaction (where the buyer actually takes possession) takes place.
Unlike U.S. sales taxes, however, the VAT is included ("VAT inclusive") in the advertised price. Assuming a 20% VAT rate for the United Kingdom, an item with a price of £5.00 would be displayed/advertised/listed at £6.00. The customer thus knows up front what the total price is.
With physical goods, this isn't difficult to understand. VAT being a national tax, even such things as printed books could (but in actuality may not) carry the correct VAT-inclusive price printed right on them. Merchants collect the taxes at the time of the sale and then later report and pay them.
The U.S. having so many different taxing authorities -- state, county, city -- as well as various exemptions within those authorities, sales taxes are calculated after all the retail prices are added up. Again, the merchants collect the taxes and remit them to the appropriate authorities. Large retail merchants who sell a variety of goods at various tax rates have much of the complicated calculations programmed into their scanners and cash registers. Smaller merchants who only sell one category of merchandise are permitted to calculate manually; in some jurisdictions they may even be allowed to calculate tax as a percentage of the list price paid rather than adding it to the list price.
You may think I'm writing this on the wrong blog and that this applies more to selling my arts and crafts than to writing books. In fact, this has everything to do with books, and almost nothing to do with selling jewelry or wooden bowls at an art show. Well, almost nothing. We'll get to that later.
What worked for physical commodities sold in physical stores/locations was one thing. Online selling of physical merchandise posed a different scenario. In the U.S. as well as the EU, application of taxes to physical goods that were ordered online and delivered from one taxing location to another required some new requirements and strategies as well as implementation procedures. In some cases it works, and in some it doesn't.
Digital distribution of digital products across jurisdictional boundaries was a bit trickier, for a variety of reasons. The most obvious issue was that since there was no physical object being transferred, there was no physical point at which the taxing authority could intercept a package and demand payment (or evidence of prior payment) of taxes before turning the merchandise over to the purchaser.
Digital downloading via the Internet also meant that buyers and sellers could be in different states, even different countries. Which taxing authorities then applied? What rates? How could the funds be collected and remitted? What currencies would be involved?
The rapidity with which digital selling of digital products has increased apparently caught the EU taxing authorities sort of flat footed. Especially when digital behemoth -- and infamous tax avoider -- Amazon got involved.
For one thing, the EU were upset that Amazon was taking over retail markets of physical goods and not paying any VAT at all, nor was Amazon paying any corporate taxes. While various negotiations were taking place to rectify those situations, the EU took steps to begin collecting VAT on one market where Amazon had a very visible market dominance: ebooks.
The EU, in order to capture revenue from huge digital sellers and Amazon in particular, declared that VAT on digital media would be assessed based on the location of the seller. Amazon then chose to set their EU location as Luxembourg (so did Nook and Kobo) whose VAT rate on ebooks is 3%, even though such a low VAT rate apparently contravened EU directives. (France's rate of 5.5% on ebooks has also been deemed in violation.)
Effective 1 January 2015, that will no longer be the case. Because of the amount of VAT funds being lost, the European Commission has stated that sales of digital products -- electronic books, crochet and knitting patterns, music recordings, digital training materials, etc. -- will have to be taxed by the seller but the rate will be based on the purchaser's home location, or at least the IP registered location of the computer or ereader device to which the file is downloaded. This is similar to how U.S. sales taxes have generally been assessed on physical goods: It's not the point of sale that matters; it's the point of purchase. As online purchases of physical goods have increased, many taxing authorities (usually the individual states) have implemented measures by which sales taxes can be collected based on the buyer's location, especially if the seller has any physical presence in that particular state. But again, it all depends on the taxing authority. They're the collectors; they set the rules. (Enforcing them may be a different matter. We'll save that for another post, I think,)
There are several stipulations involved in all this beyond just the assessing, collecting, and remitting of the tax itself.
- The listed price posted by the digital seller must include the specific VAT amount for the prospective purchaser and that VAT-inclusive price must be posted prior to any sale. The VAT amount can't be tacked on afterward the way sales taxes in the U.S. are.
- The seller must be registered with the EU and each member state (there are 28) in order to collect and remit the funds. (There are some procedures in place for "one stop shopping" programs to allow digital merchants to remit VAT monies to just one location, which will then distribute according to the merchant's tax return.)
- Returns must be filed quarterly to those 28 member states.
- Records identifying each and every purchaser's location via IP as well as corroborating indentification evidence must be kept a minimum of 10 years and it must be stored on a server in the EU for auditing purposes.
- Sellers' records must be auditable.
- And so on.
Amazon is complying with the order, albeit imperfectly. Some other distributors of digital publications are not.
Amazon's fix is not, as I said, perfect, and that lack of perfection will have a direct and potentially serious impact on the digital self-publishing author.
Digital publication has allowed author-publishers to put their digital products online via a single distributor and then sell virtually anywhere in the world. Amazon's Kindle dominates the ebook market. One report suggested that 9 out of every 10 ebooks purchased in the UK came from Amazon. But Amazon isn't alone. There are other ebook distributors such as Smashwords, Nook, and Kobo, but there are also craft-oriented sites such as Etsy.com that allow "shop" owners to upload and sell digital files such as knitting patterns and downloadable graphics files. The files are held on the website's servers -- not the seller's -- and downloaded automatically upon payment, usually through PayPal or another automated payment platform. The EU and the UK's taxing authority HMRC have stated that such platforms constitute "3rd party" sellers who are liable, as is Amazon, for the collection and remittance of the taxes as well as the recordkeeping. I'll get to the details of that distinction in a subsequent post, but I wanted you readers to know that Amazon isn't alone.
But getting back to ebooks in the EU. The VAT rates on ebooks in the European Union range from 3% (Luxembourg) to 27% (Hungary). There are 28 taxing bodies. (Because most of those member states have more than one rate, there are actually the possibilities for 75 or so different rates on various products, but this post is only concerned with ebooks.)
Let me reiterate part of this: The law that is slated to go into effect on 1 January 2015 (two weeks from today) includes the stipulation that each digital product be priced to include the appropriate VAT amount. Thus, to use one example, a digital book priced by the publisher/author at £5.00 in the U.K. would have to be listed at £6.00 to cover the 20% VAT rate. Amazon has its amazon.co.uk website, so the Kindle edition of the book would appear there at £6.00. Amazon would collect that amount, remit the £1.00 VAT to the taxing authority (HMRC), and pay the author's royalties based on the selling price of £5.00, which the publisher/author set.
In the event, however, that a copy of the book is purchased from the amazon.co.uk site by a customer in Ireland, the numbers change. The Republic of Ireland has a VAT rate of 23%, which on that book would be £1.15. Since there is no separate Kindle pricing available for Ireland, the Irish VAT would be assessed and paid out of the posted price of £6.00, but now the publisher/author's selling price is docked to cover the shortfall, and subsequently her royalty from Amazon is based on £4.85. In effect, the author in the U.S. has subsidized the higher Irish VAT rate. The author can set a higher price, of course, to cover the Irish VAT, but that means the UK buyers will also be paying the higher price, too, and higher than they really need to. Amazon will essentially split the difference with the publisher/author.
Amazon does not provide sufficient information to the publisher/author distinguishing the number of sales to Ireland and the number of sales to the UK. The publisher/author just has to make a guess.
The VAT was never intended to be paid by the producers of the goods but by the consumers.
Amazon does have a variety of websites for Kindle publishing and publisher/authors are able to set the prices for each of those venues to cover the VAT rates. But those venues do not cover all the taxing situations. Amazon.de would presumably cover the 19% rate for Germany as well as the 20% rate for Austria, since Amazon doesn't have a unique Austrian platform. The publisher/author will have to cover the 1% shortfall.
No big deal, right?
But what about situations involving France? Amazon.fr will presumably require ebooks to be priced to include the 5.5% French VAT on ebooks. Can a Kindle buyer from Sweden buy Kindle books from Amazon.fr? If so -- I've searched and haven't been able to find anything definite yet -- who pays the difference between the French 5.5% VAT on ebooks and the Swedish 25%?
So far, I have not been able to find out if buyers from Sweden even can purchase from Amazon.fr, or are they restricted to Amazon.co.uk, or can they buy Kindle books at all?
If there is a shortfall, even if it's 19.5% between the VAT-inclusive French price and the 25% Swedish VAT rate, how much you wanta bet it's gonna be charged to the publisher/author as a deduction from the selling price of the book, with a resultant diminution of the publisher/author's royalties?
So far, only France, Luxembourg, and Malta have applied a substantially reduced VAT rate on ebooks. Austria, however, only applies a 10% VAT to physical books and periodicals. Other EU member states also have lower rates on books, magazines, newspapers. Ireland and the UK impose no VAT at all to physical books and periodicals. That reduced rate does not apply to digital books and periodicals, per the EU declaration that it's not really clear that digital and print media are equal, the same, equivalent. (They are discussing the issue, however.) After all, digital books have linkable indexes and so on. (Never mind that digital books require some kind of digital reading device; physical books don't. Or that digital books cannot be legally resold because they aren't legally "owned." Did you know that? You really don't own any of those Kindle books. All you have is a license to read them. . . .)
If the Kindle books are sold(sic) and taxed at the rate posted on the Amazon marketplace website but purchased by someone in another country with a different VAT rate, the tax is going to be applied unfairly. Either the publisher/author will have to subsidize the buyer if the posted rate is too low, or other buyers will be paying more than they should.
There is another effect of this variability in taxation: The publisher/author may take an even greater hit when it comes to royalties because of KDP's two-tiered royalty schedule. That issue is just full of math (or maths) so let's save it for Part 2, shall we?