Important: Backdraft and VAT

Freeway
1

Guess what? More bad news about the VAT tax!

On January 1st, there will be some big changes in the VAT tax code. As many of you may know, it’s switching to a system where the seller pays the tax to the country of residence of the consumer for all sales of digital goods.

When I first heard about it, I dismissed it, as I thought “I’m not in the EU, it won’t affect me”. Life was pretty good. Then I found out that it doesn’t matter where your business is based; if you sell a digital good to someone in the EU, you have to collect and pay the taxes. This fact partially blew my mind, and I must admit that as your stereotypical red-blooded American, I wasn’t happy with this at all.

I thought that was bad, but then it got worse. As I applied to get my tax ID number so I could pay the VAT tax, I was informed that, because I am a foreigner, I need three documents to prove my identity and sign up to pay the tax. The problem is that I only have two out of the rather short list of accepted documents. Unless I get married, divorced, or take out a mortgage before January, I literally can’t pay the tax. And if I can’t pay the tax, I can’t get Backdraft to my good buddies across the pond.

:0

Right now I’m exploring my options – but it doesn’t look very good, and it will almost certainly result in me having to increase the base selling price of Backdraft (the selling system that I will probably need to switch to is about 8x the cost of what I’m currently using). In addition to that, starting January 1st, all you folks in the EU will have to pay your local VAT tax in addition to the selling price.

I will also likely stop all sales on December 30th while I try and get another setup working so that I can legally sell Backdraft.

So, consider yourselves warned: If you want to pick up Backdraft before the price goes up, purchase it before I shut down the sales on December 30th.

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2

Does this apply to everyone in America or just in foreign countries?

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3

Caleb,

Not that i want to encourage anyone to break any laws, and i am no expert on this but what happens if a person wants to buy BackDraft who uses a VPN to link to a USA host how will your system know that the buyer is in Europe?

John

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4

Does this apply to everyone in America or just in foreign countries?

The price increase will apply to everyone, as I’ll likely have to switch all my systems over to a much more expensive solution (probably FastSpring). Why? Because FastSpring will actually pay the VAT taxes, not me. As I mentioned above, because I don’t have a marriage license, divorce license, or mortgage paperwork, I can’t meet the three-document criteria to even sign up to pay the taxes. And unless the taxes get paid, Backdraft can’t be sold to people in the EU.

Back when I started OnRamp Web Design, taxes were a pain as I was 16 and the tax code wasn’t written with minors in mind. I was so excited to turn 18; taxes became instantly easier. Now I find I’m up against the same wall. The system was apparently set up for middle-aged folks who have purchased a home and gotten married, not me.

The taxes, on the other hand, only apply to people from the EU who buy Backdraft. Just like sales tax here in the US, the customer pays for it but the business must pass that on to the government. Important note: a website is not a “digital good” from what I’ve read, as it requires creativity and customization. Backdraft is a digital good, as everyone gets the same product.

Non-EU residents won’t be paying the tax, but they will be paying the increased cost due to the more expensive selling system to accommodate these crazy EU taxes.

Not that i want to encourage anyone to break any laws, and i am no expert on this but what happens if a person wants to buy BackDraft who uses a VPN to link to a USA host how will your system know that the buyer is in Europe?
probably purchase a digital good without paying the tax via a VPN. However, it would be tax-evasion on their part and illegal from what I know.

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5

Until The Man finds a way to effectively regulate, track and/or block such VPN e-commerce activity I imagine it would work fine, much like accessing country-restricted Netflix or YouTube content. The catch however is if the VPN service you use keeps traffic logs (some do, some claim they don’t) which I suppose a gov. agency could potentially request via a court order.

Todd
https://xiiro.com https://xiiro.com/

probably purchase a digital good without paying the tax via a VPN. However, it would be tax-evasion on their part and illegal from what I know.

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6

The EU got themselves into this mess and those of us not in the EU shouldn’t have to foot the bill for their excessive regulations and taxes. I thought we dealt with that a couple of hundred years ago? Maybe it’s time for a cyber tea party. BTW, I have an absolutely beautiful unmarried daughter who was also homeschooled. Hmmm.

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7

There is one aspect of this EU change that is confusing. At least in the UK you have to be VAT registered to add VAT to your invoice. And to get a VAT registration you have to have a minimum annual revenue at the current rate that is £81,000 which is approx. $130K per annum.

As i understand it if you are not generating this sort of revenue per annum then you are not eligible to charge VAT and hence you do not have the problem… or am i missing something??

John

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8

At least in the UK you have to be VAT registered to add VAT to your invoice. And to get a VAT registration you have to have a minimum annual revenue at the current rate that is £81,000 which is approx.

I think the problem lies in the fact this is an EU law and in some countries in the EU there is a zero threshold for VAT, thus forcing you to register for all, if you sell digital products in Europe.

http://rachelandrew.co.uk/archives/2014/10/13/the-horrible-implications-of-the-eu-vat-place-of-supply-change/

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9

You can register for VAT at any revenue but it’s only compulsory (in the
UK) above £81,000 pa.

The change in the rules only affects EU-based businesses selling within
the EU. In theory the same rules already apply for the US but are
unenforced (if not unenforceable).

http://www.happybootstrapper.com/2014/im-us-whatll-happen-just-ignore-eu-vat-changes

Roger

–

Roger Houghton
Bath, Somerset, UK

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10

I feel your pain Caleb. VATMOSS has the potential to cripple a small business who see some of their revenue from micro digital sales like Actions, templates, knitting patterns etc. Here in the UK we’re deeply tied to European tax laws so I can only imagine views in other parts of the world where businesses are being controlled from jurisdictions thousands of miles away. My personal opinion is that the law will be cost prohibitive to enforce for smaller sellers and that they’ll introduce a threshold to eliminate smaller sellers from these issues.

Until that happens my ‘cunning’ plans for dealing with VATMOSS are (in order of importance);

  1. I’ll be looking to move my Actions and template sales over to Digital Goods Store (http://www.digitalgoodsstore.com/) who currently deal with my templates. They are working on a fully serviced solution which (for an increased slice of the pie) will deal with VAT as well as digital goods delivery etc. Essentially I’ll be selling my goods to them who will sell the products to the user. Assuming they get the system up and running in time, and it all works, this is the way I’ll be headed.

  2. Rolling back to 2001. When I first started FreewayActions.com back in 2001 I’d take payments for Actions and then manually email them out to buyers. This worked quite well (unless I slept or took a holiday) although back then people were a bit more tolerant of waiting 24-48 hours for their software. We now live in an ‘on-demand’ world and a delay of an hour or two can get people making chargebacks and sending threatening emails (I’ve had a few of them when purchase confirmation emails have bounced). Sending software in emails like this is excluded from VATMOSS as long as you prepare them manually. You could script this so that the emails are automatically sent out when you receive a purchase confirmation but I suspect you’d be breaking the law. Then again who would know (unless you read this)? Again I used to do this before I finally moved the Action sales over to using PayPal’s IPN system which has been working pretty well for the last ten years or so. Somewhere I have a very old script that I used to use with sales through my Kagi store although I doubt it would work still.

  3. Option 3 is to just mail a CD of the software out to buyers. I really only need to do this for non UK buyers in the EU but to keep my accounts simple I suspect I’d have to do it for everyone. eBay here in the UK has a similar set of rules that you can’t sell purely digital goods and a lot of sellers will email you a link to your purchase and then simply post you a CD to comply with these rules. Again mailing a physical product will bypass the VATMOSS rules as they only pertain to digital goods delivered in an automated manner.

All in all these ‘solutions’ make me feel young again as they are the sorts of things that I ‘had’ to do a decade ago. Technology has moved on by the tax man hasn’t.

I almost forgot option 4.

  1. A big bucket of sand. I’ve a bucket of sand that I can just about get my head into. If I bury it deep enough I won’t be able to hear the tax man beating at my door. :slight_smile:

All the best,
Tim.

FreewayActions.com - Freeware and commercial Actions for Freeway Express & Pro - http://www.freewayactions.com

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11

How does this not amount to an import tariff?

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12

It’s a local sales tax, basically. Managed in much the same way that Apple has to collect local sales tax when it sells something to you on line. In Apple’s case, it makes perfect sense, as they have physical locations in a majority of habitable locations on Earth*, so I don’t think it’s that ridiculous. But this does chafe when it comes to micro-enterprises selling to other micro-enterprises in a virtual context. I’m watching this with interest. While Inlay has so far failed to do anything but break even, I am hoping that it becomes popular enough for me to pay an accountant to worry about this. I take payments through Stripe, and they are very smart folks who may have already solved this for me.

Walter

*For certain definitions of ‘habitable’.

On Dec 20, 2014, at 7:54 AM, Ernie Simpson email@hidden wrote:

How does this not amount to an import tariff?

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13

The new regulations only affect EU-based businesses selling within the
EU. Outside the EU the same rules have been around since 2003 but with
no means of enforcing them.

Roger

Roger Houghton Bath, Somerset, UK

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14

Actually looking at what the UK tax man has to say about what is taxable and what isn’t (what is an electronically delivered product after all?) I think my PayPal IPN system may already be exempt as it doesn’t automatically download the software or automatically email the software to the buyer. It simply sends the buyer information allowing them to download it securely from the web.

The nitty-gritty is here and makes for great bed-time reading!
VAT rules for supplies of digital services to consumers - GOV.UK
Regards,
Tim.

FreewayActions.com - Freeware and commercial Actions for Freeway Express & Pro - http://www.freewayactions.com

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15
  • cojr

[The EU got themselves into this mess and those of us not in the EU shouldn’t have to foot the bill for their excessive regulations and taxes. I thought we dealt with that a couple of hundred years ago?]

…

We in the EU have regulations and taxes, but for very good reasons. Please get better informed. (And we have to pay the same taxes too for as long as I can think.)

Proving identities

To prove an identity to sign up to pay the tax in times of worldwide corruption and abuse is basically a very good thing to do. This is my opinion.

For example we have a duty to register in the registration of address office of Germany in order to prove or let proved ones identity. In the US there is nothing compared like the registration of address office.

But I must admit that I pity Caleb and the other small non-eu-businesses.
Hopefully there will (and must) be easier ways in future!

Excessive regulations?

The regulations make absolute sense, because we don’t want genetically modified food for instance and its massive risk. (This is the opinion of the major part of Germans.) and many other things we don’t agree to.

Think of the irresponsible environment policy of US, China and other countries that was again shown in the Climate Conference in Lima 2014 that reflects the general attitude (and in the end their business products that come here).

Excessive Taxes?

Thanks god the time is over when Disney, Skype, Koch Industries, Reckitt Benckiser („Calgon“, „Clerasil“), KPMG, Deloitte and Ernst & Youngcould and many others sell their products with hardly paying taxes in the EU via Luxembourg at all!!

Perhaps we do things different, but in a global world and global business we have to find common rules. And as we grow more and more together here in Europe, which is a great but not easy thing to do, I know that on its way with 28 different states and cultures, there are and will be obstacles and sometimes huge hickups in the presantation.

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16

PS: REVISION, I MEANT

Proving identities

To prove an identity to sign up TO MAKE BUSINESS WITH EU INHABITANTS in times of worldwide corruption and abuse is basically a very good thing to do. This is my opinion.

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17

Simon is correct regarding the minimum thresholds – from what I’ve read on the topic the threshold simply does not apply to digital goods. I don’t know if they simply forgot to include it, but it isn’t there.

Tim, thanks for your excellent suggestions. I’m still exploring my options and will report back once I make a decision. Also, what you said about your PayPal IPN system is very interesting, as the system that I am using does the same (sends a link, not the actual product). The verbiage on the webpage that you linked to does not seem terribly clear on this matter, but does seem to indicated that this kind of a system might be an exception. I’m going to have to look further into this. Here’s the info from the website for the benefit of others:

  • where the sale of the digital content is entirely automatic eg, a consumer clicks the ‘Buy Now’ button on a website and either:
    • the content downloads onto the consumer’s device
    • the consumer receives an automated e-mail containing the content
  • where the sale of the digital content is essentially automatic, and the small amount of manual process involved doesn’t change the nature of the supply from an e-service

BTW, I have an absolutely beautiful unmarried daughter who was also homeschooled. Hmmm.

Hmmm…you know that taxes are getting very odd when this comes up the conversation as a solution. :slight_smile:

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18

Tim,

Never mind that, I just found this in the comparison table on that website:

Service e-service Electronically supplied? Covered by the new rules
Link to online content or download sent by manual email Yes Yes Yes

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19

The new regulations apply only to EU-based businesses selling to EU
residents. The rules for US-based traders will continue to be as they’ve
been since 2003. Until there’s any sign of anyone attempting to collect
VAT in the USA there doesn’t appear to be any reason for you to do
anything.

http://www.happybootstrapper.com/2014/im-us-whatll-happen-just-ignore-eu-vat-changes

Roger

–

Roger Houghton
22 New King Street
Bath, Somerset, BA1 2BL

On Mon, 22 Dec 2014, at 07:37 AM, Caleb Grove wrote:

Tim,

Never mind that, I just found this in the comparison table on that
website:

| Service | e-service | Electronically supplied? | Covered by the new
rules
| ------ | ------ | ------ | ------ |
| Link to online content or download sent by manual email | Yes | Yes |
Yes

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