Recently, there has been a lot of buzz in the blogosphere about VAT, or the European Union’s Value Added Tax. Many bloggers in the United States are confused, so I want to explain exactly what VAT means for US bloggers and how it will change the way you sell digital goods and services online.
Although VAT was enacted in 2003, the changes effective January 1, 2015 have brought attention to the impact on all non-European residents who sell digital goods and services to consumers within the European Union. So, if you have an online store on your blog and have customers in Europe, this means you… regardless of where you live. [SOURCE: GOV.UK]
As of January 1, 2015, there will be significant changes to the European VAT rules on sales of digital goods and services to retail consumers in Europe. These changes increase the VAT compliance burdens on all sellers, wherever those sellers are located.
Please note that the Value Added Tax is not based on the seller’s location but the rate is designated by the consumer’s country of residence and may vary greatly from country to country, reaching as much as 27% of the product’s value.
Being VAT Compliant
If you sell digital goods and services to consumers in Europe, you must follow the instructions for submitting the Value Added Tax.
- You must register as a non-resident seller for VAT prior to any sales to European customers.
- Even if the tax equates to only $0.01 USD, you must still submit payment.
- The VAT rate must be included in your retail price and not listed separately as a US state sales tax would be.
- Payments are submitted quarterly. To avoid having to pay each country individually, you can choose a simpler system for reporting with VAT MOSS. [SOURCE: VAT Mini One Stop Shop, UK.GOV]
- Information regarding the transaction must be kept on file for 10 years.
Many eCommerce plugins and websites are updating to include VAT compliance.
- Woothemes has announced a Woocommerce VAT extension that will collect and validate the consumer’s IP address and their country of residence.
- Shopify will be supplying you with the customer’s billing address and IP address for you to pursue VAT compliance. [SOURCE: Shopify]
- Easy Digital Downloads offers an extension to make VAT compliance possible.
- Ejunkie is trying to explain how to be VAT compliant while using their services.
How the tax is enforced upon US businesses
Several bloggers have touted that the European Union has no basis to command United States business owners to pay VAT. They have said that VAT will be impossible to enforce. Perhaps, but many analysts anticipate that other countries will enact a Value Added Tax as Europe’s model is receiving high praise.
- Canadian legislature is consider its own VAT. [SOURCE: The Globe and Mail]
- India plans to solidify changes to their VAT in April 2016. [SOURCE: Indian Express]
- Senate Finance Committee member, Benjamin L. Cardin, plans to introduce legislation for a United States VAT. [SOURCE: Lexis Nexis]
Sellers of digital goods need to settle into the idea and stop claiming ignorance as the European Union plans to tighten the enforcement of VAT using web bots to find eMerchants in violation. [SOURCE: Taxamo] The United States has already pledged to cooperate in several treaties and documents including the Economic and Technical Cooperation agreement between the US and Bulgaria in 1998.
What we [HMRC] and other EU tax authorities are doing is if we found that one of these businesses is non-compliant then through treaties arrangements that we have with the jurisdictions, through information exchange or debt recovery, we would then approach the authorities in those other states to take action to help us to get the debt paid.
Those arrangements are going to be reinforced, and strengthened, effectively in the coming months and years to make sure that there aren’t jurisdictions out there where someone could effectively hide and make those supplies without properly declaring.
Limitations to Europe’s VAT
What is included under the VAT changes? View a comprehensive listing of digital services and goods by Taxamo.
But what is NOT included?
A video is embedded above.
Here are a few important notes recorded by My News Desk during a Twitter Q&A with HM Revenue and Customs that was mentioned in the video above:
A2 What constitutes an e-service? #VATMOSS
An e-service is one that is fully automated and involves no or minimal human intervention. #VATMOSS
A4 Does #VATMOSS apply to web hosting, SAAS, cloud storage, analytics, online accounting, remote maintenance and web advertising? #VATMOSS
Yes if those services are automated and involve no, or minimal, intervention. #VATMOSS
A5 Does this mean I need to be VAT registered to sell ebooks? #VATMOSS
If you sell ebooks to consumers in other member states through own fully automated website this will be an e-service, so yes. #VATMOSS
A6 If I run a paid live webinar (human interaction) and have a free pdf download with it, is that liable under #VATMOSS?
No, the live webinar is not an e-service and the pdf download, provided it is genuinely free, will not be affected by new rules. #VATMOSS
A7 Is delivering part live, part downloadable content to customers around the EU exempt from #VATMOSS?
Live content not an e-service, downloadable content is. Depends on which part of transaction was principal element for customer. #VATMOSS
A8 If I have paid membership for my website and people can then get free online courses, is that a digital services under #VATMOSS?
If course is fully automated it’s an e service. If there is “human intervention” eg online tutors, live Q&As etc, it’s not. #VATMOSS
A9 What about virtual classrooms combining live webinars, videos, pdfs & human intervention? #VATMOSS
A virtual classroom combining all these elements would not be an e-service because of the amount of human intervention involved. #VATMOSS
A10 What if an e-course contains recorded videos & PDFs but is opened at specific times only + has live interaction? #VATMOSS
The inclusion of live interaction means that this is not an e-service. #VATMOSS
A11 If I offer coaching (human intervention) with an online course, how do I handle that to comply with #VATMOSS?
The inclusion of live coaching means that this is not an e service. #VATMOSS
You should read the complete Twitter Q&A transcript as it includes details on the VAT implications for Paypal, Etsy, Kickstarter, and more.
How to avoid paying VAT
If you have an online store and want to avoid paying VAT completely, you have one option: Block sales to consumers living in Europe. Most eCommerce plugins have a way to limit the countries allowed to purchase through your store.
- You can block countries under the settings of Woocommerce.
- Tips and Tricks has an add-on to assist you in blocking countries in WP eStore.
You can also use a 3rd party eMarketplace such as Amazon, Etsy, etc. who assume responsibility for being VAT compliant for you.
Wow. I feel like I need to take a deep breath because this is quite a lot of important information, and I probably should have divided it into multiple posts. However, I remain determined to educate you for your protection and thought one thorough piece would keep you from plundering around Google looking for help in decoding this complex piece of legislation that will impact so many of us.
I truly hope you are ending with a clear understanding of VAT and what it means to US bloggers. Now, go make sure your blog is VAT compliant.