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Coping With VAT: EU's New ECommerce Tax

Sharon Housley
Expert Author
Published: 2003-10-23

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The EU VAT directive has caused significant controversy amongst developers and online software registration services. Part of the confusion has comes from the vagueness in the directive and questions with regards to the jurisdiction that the EU has over the US to enforce its policies. The implementation has skewed the playing field in favor of EU companies, while putting a significant burden on US businesses that do not benefit from the tax.

Because of the lack of clarity in the directive, developers are finding that many registration services are interpreting and reacting to the directive differently. In order to clearly illustrate the varied positions of the software registration services, I sent out a questionaire to 5 of the more popular online e-commerce services in the software industry.

The 5 registration services interviewed were:

Digital River - including RegNow, RegSoft, and Digibuy (will also cover RegNet once they are fully integrated into DR's system) located in the US and HeadQuarters in England

SWREG - located in England

eSellerate - located in the US

ShareIt / Element5 - located in USA, UK, Germany, France, Italy, Sweden.

Emetrix - located in the US

The following are the questions I posed along with the varied responses I received.

1. Are you collecting VAT at this time?

Digital River - Yes, Digital River's ecommerce providers collect, remit, and report applicable VAT based on the EU's new directives that took effect on July 1, 2003. We are fully compliant with the new requirements, and have invested significant time and resources to ensure our clients are working with a provider that understands the nuances of the laws.

SWREG - Yes

eSellerate - Yes. We have been VAT compliant since inception.

ShareIt - Yes, we provide an optional full service for software authors to do complete handling and submission of VAT payments.

Emetrix - No, see comment below for expanded explanation.

2. How is the commission handled with VAT (e.g. how much commission does a developer pay on the VAT portion of the sale?)

Digital River - Each property charges only 4.8% of the VAT price, not the standard processing fee, to cover the additional credit card, fraud, and VAT administration costs associated with the new fees that are borne by the consumer. This fee is separate from the commerce fee applied to the order and is not on top of the commerce fee paid by our vendors.

SWREG - Typically 4%

eSellerate - There are none as eSellerate does not charge any commission or processing fees on the VAT amount.

ShareIt - It varies from pricing model and individual model. Typically, there is a variable percentage of 5% as part of the commission, which applies to the VAT portion as well.

Emetrix - see detailed quote below

3. Is there any way a developer can have a product marked as 'exempt' from VAT?

Digital River - Our properties sell software products on behalf of our clients. Because software is not exempt from EU VAT, there is no need for a developer to exempt a product within our systems.

SWREG - Yes if it is a zero rate or exempt product.

eSellerate - Not currently, but eSellerate is committed to remaining in VAT compliance and providing our customers with the tools necessary to do so. We focus primarily on selling digital goods, and
these are all taxable according to the current VAT directives.

ShareIt - Yes, absolutely. The authors have that flexibility as the product itself might be exempt, or he is selling to businesses only.

Emetrix - see detailed quote below

4. How do you handle customers who are exempt from VAT (e.g. a VAT registered business)?

Digital River - Currently, when a customer is VAT exempt and enters their company name in our order forms, a page is displayed that allows them to enter a VAT exemption number to have the VAT removed from their online order. At this time, we are in full compliance with the means set forth to determine the exemption status of european companies.

SWREG - We charge VAT then issue refunds on receipt of proof of entitlement (to avoid fraud).

eSellerate - eSellerate prompts for and validates the VAT ID for the business or other applicable party and upon successful validation, VAT is not levied on the transaction. If any customer feels they were charged VAT incorrectly, all of the required information is provided to them to proceed accordingly.

ShareIt - For corporate and business purchases we perform a real-time check of VAT IDs in order to enable companies to purchase without VAT being charged at the point of sale. This is really important as business purchases are exempt from the new regulation.

Emetrix - see detailed quote below

5. How do you deal with physical shipments (e.g. do you add VAT to orders that are shipped on CD ROM?) If so, are customers ensured that they will not have to pay VAT before they can get the physical product?

Digital River - To the best of our knowledge, CD-ROMs are manufactured and shipped out of the United States into the EU. Our properties do not tax these shipments with respect to the Simplified Rules (which is the option our properties follow). The carrier will invoice the consumer for the VAT with any taxes assessed at the point of entry, who in turn will repay the carrier for the VAT amount plus a small administration fee.

SWREG - Yes. We recommend vendors print out the printable VAT invoice (we send them a URL with each order) and place it in a clear pouch on the outside of the package. Also saves the customer having to pay a collection fee to the post office (or even having to collect the package from the post office).

eSellerate - VAT is currently being charged on electronically provided goods only. No physical orders are processed with VAT per the EU directives.

ShareIt - The new regulation does not affect physical shipments of most standard software. For physical shipments, the regulation remains the same that VAT and possibly other duties are charged upon importation of the physical good into a country within the European Union, and is usually paid by the customer. Typically, there are export stickers or forms that need to be attached to the shipment, that has not changed since the new regulation. For authors using our physical shipping and warehousing facilities, this is something we do and have done for them automatically. If they ship themselves, we can either collect VAT for them and they handle the formalities, or the users pay import taxes upon delivery in their country, which is a common way of doing it.

Emetrix - see detailed quote below

6. Is it possible for the developer to 'eat' the VAT (e.g. instead of requiring the VAT to be added to the order total?)

Digital River - Yes, specifically on RegNow the author can determine the total price, inclusive of VAT, that they would like to charge to the end customer. In this case, the actual VAT amount is taken out
of the total order price and the commissions are deducted also, with the rest sent off to the vendor.

SWREG - That is illegal. He can reduce his pricing to EU customers by 17.5% if he likes but VAT will be added to the reduced price. I tis not legal in UK to advertise a product "No VAT charged" and probably the same elsewhere. eSellerate - No.

eSellerate - No

ShareIt - Yes, absolutely.

Emetrix - see detailed quote below

7. Are you collecting VAT for all the various rates or do you collecting at 1 specific rate, if so what is that rate?

Digital River - Each of the properties falls under the Simplified Rules for VAT collection. This means the VAT rates charged to the consumer vary by country that the purchaser resides within. (see VAT chart below)

SWREG - During the interim phase until July 2006 we are charging a single rate of 17.5% (or zero % if a valid product). After July 2006 we will have to charge separate rates depending on the country if importation.

eSellerate - eSellerate collects at all applicable rates.

ShareIt - We collect at the local rates, which vary from country to country. These are either determined by the author (if within the E.U.) or the end-user (non-corporate), if author resides outside the E.U.

Emetrix - see detailed quote below

8. If the currency exchange rate increases who is responsible for the difference between the time of the sale and when the VAT is submitted?

Digital River - With RegNow, we collect and store conversion exchange rates on a daily basis. VAT collected will be based on these rates for USD transactions and exact amounts for GBP and EURO transactions removing the removing the risk of a fluctuating currency. Our vendors can choose to transact in a native currency or in USD. Either way, our system protects these clients from one currency moving in the wrong way when taxes are remitted to the government.

SWREG - Our problem.

eSellerate - eSellerate bears full responsibility and risk associated with any currency exchange and fluctuations. End users and our customers will never be accountable for this.

ShareIt - We assume that responsibility. As we collect payments in local currencies and deposit them in local currency accounts in real-time, we reduce the risk of fluctuation to a minimum. Authors have two option to set their prices in either local currencies, either pre-set the local currencies values (e.g. to strile a certain marketing price) or one fixed price in one currency in order to have no currency risk at all. Currency conversion is then doen on the fly when the user orders.

Emetrix - see detailed quote below

QUOTES FROM REGISTRATION SERVICES

Digital River - Digital River and its properties are committed to compliance with the EU Directives stating VAT must be charged according to the laws set forth by Council Directive 2002/38/EC - Amedning 77/388/EEC. We would not knowingly allow our clients to be party to a transaction that breaks these laws. As the company which faciliates the transactions, we bear this burden to collect, remit and report the VAT amounts due the appropriate EU member countries. Our objective is and remains to be compliant with the rules and regulations set forth by the EU, now and in the future. --- www.digitalriver.com

SWREG - "Keep to the law to avoid being prosecuted. I just went to a very high level government meeting and they are looking for targets of different sizes to prove they can prosecute serial offenders "pour encourager les autres". By selling in to an EU country, even when a remote sale, you must abide by the laws in those countries you are selling in to. It is not you paying the tax, it is the customer who is expecting to pay it. Many get it back anyway. We have been charging VAT now for over a month and the overall impression we get is that sales reamain constant. EU customers expect to be charged VAT so it is not a major issue to them as much as it may seem to you. Why not let your registration service worry about the administration while you worry about your coding?". --- www.swreg.com

eSellerate - There is some debate as to the best direction commerce and other internet providers should be taking regarding the recent VAT directives, the lack of authority of EU members over non-EU business, businesses obligations under these directives, etc. Our position is simple: we participate in a global economy and have customers located in every corner of the world and will behave accordingly by following the legitimate and lawful positions, directives and regulations that impact our business, and more importantly, the business of our customers. --- www.esellerate.net

ShareIt - It is important to be able to cater to local needs of customers, which includes proper tax collection and remittance. share-it! has been a global e-commerce provider for seven years with presences around the world, gaining a unique level of experience dealing with global e-commerce. That is reflected in the options and the service offerings that are available to our customers today. --- www.shareit.com

Emetrix - As a small business without a physical presence in the EU, we felt it would be prudent to carefully to evaluate the EU directive and its practical implications as we define our business policy. We have been studying this since the original release of information in early 2002 but by no means claim to be VAT experts. Having a customer base from all over the world, we must carefully evaluate how the choice to collect or not collect VAT impacts our customers' businesses, and make a responsible decision based on our customers' needs, applicable laws, and general industry practices. At the present time, we are not collecting VAT, but continue to talk to our accounting and legal advisors about the issue. We have also solicited feedback from many of our customers to determine their opinions. As we continue our research, we will be better able to make a decision that is not only wise for our business, but also in the best interests of our customers. Since we are not presently collecting VAT, it is not possible to comment about specific VAT implementations. However, should we decide in the future to begin collecting VAT, we will make details of our implementation readily available on our website. --- www.emetrix.com

WHAT YOUR E-COMMERCE PROVIDER IS NOT TELLING YOU
You may be liable for the collection of VAT not your ecommerce provider. The nature of your ecommerce agreement with your registration service may dictate who is legally liable should the EU wish to pursue VAT collection. The key to responsibility is whether or not, your registration service is a reseller (like Emetrix), taking brief possession in the course of the sale. If they are a reseller, VAT collection is the ecommerce service's responsibility.

Some registration services are simply agents processing transactions, which would meant that legally they would *not* be legally responsible for VAT. Share-It has an unusual arrangement, which I don't quite understand, according to Gerrit Schumann, Share-It! can be both agent or a reseller. The default agreement is based on the agent model (where the developer is liable), but reseller agreements are also available (where Share-It is liable).

SO WHAT ARE THE VAT RATES ANYWAY?
End-user Resides/Percent Charged:

Austria 20 0 %
Belgium 21.0 %
Denmark 25.0 %
F inland 22.0 %
France 19.6 %
Germany 16.0 %
Greece 18.0 %
Ireland 21.0
Italy 20.0
Luxembourg 15.0
Netherlands 19.0
Portugal 19.0
Spain 16.0
Sweden 25.0

Keep in mind if your business is located in an EU country you can charge the rate of the country you are selling *from* which is often lower than the rate where the end-user resides. As I understand it US companies do not have that luxury, they must abide by the simplified rules which means charging a different rate for each region based on where the end-user resides.

QUOTES FROM DEVELOPERS REGARDING VAT
"I have enough problems with U.S. taxes, but at least I have a vote on how they are implemented via my elected representatives. Under no circumstances will I act as Tax Collector for the European Welfare State, where no such representation exists, let alone any U.S. law mandating that I do so. I have my own merchant account so my way of handling VAT is simply to ignore it." --- Kent Briggs - Briggs Software www.briggsoft.com

"The EU's new VAT regulations are grossly unfair to US businesses, while favoring EU businesses. Businesses outside the EU must collect taxes for the EU, while businesses within the EU don't have to collect taxes for the US. In addition, small businesses within the EU are with sales below a threshold are exempt from VAT collection, while small business outside the EU are not! Finally, these VAT regulations place an undo burden on small US businesses. "

"Our accountant has estimated it will cost us nearly $1,000 (U.S.) to collect this VAT, account for it, and convert and wire the money (which would actually amount to less than $100.00) to the EU! The US Supreme Court has already ruled on just this type of commerce interference in the Quill vs North Dakota case. Their ruling explains why US businesses do not have to collect sales taxes on sales made to other states unless their company has a physical business presence in that state." --- Gary Elfring - Elfring Fonts www.elfring.com / www.cd-ship.com

"IMO, the EU has jumped the gun with the new Directive. It is an unenforceable piece of legislation that in many ways goes against the principles regarding taxation set out in the OECD's Ottawa Taxation Framework, particulary those parts of the framework that refer to "tax neutrality".

"There are also serious questions that need to be asked in the US about the nature of the authority that the EU effectively claims to have over US citizens and companies. In my view the Directive challenges a number of US Supreme Court judgements and indeed the authority of the US Constitution itself (particularly the 14th Amendment). This is a serious issue that goes beyond matters of taxation, it should not be ignored."
Allen Woods --- JIT Software www.jit-software.com

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About the Author:
Sharon Housley manages marketing for FeedForAll http://www.feedforall.com software for creating, editing, publishing RSS feeds and podcasts. In addition Sharon manages marketing for FeedForDev http://www.feedfordev.com an RSS component for developers.

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