Envato is incorporating in the US

Envato is expanding operations to the United States, with an official incorporation. Many large companies do this, where they are registered in their home country, and again in large business centers. The US is a huge business center for Envato (both for sellers and buyers), and the incorporation allows them a number of privileges.

Along with more growth opportunities, being in the US will help us service US buyers with more targeted payment methods leading to better conversion rates and happier buyers. This requires some important changes to how US buyers, and all authors, affiliates and Envato Studio providers interact with Envato. We’re announcing this almost three months ahead of the US launch date to give you time to plan and prepare.

The will begin operating under the new business for US buyers and sellers in January. From a tax perspective, the move means author fees will be included in the gross income for authors, who will be required to submit a 1099.

In the forum post for US author questions, Collis and other Envato team members explained the purchasing procedure and tax reporting like this:

  • When a sale happens, your account is credited with that sale and you have earned royalty revenue from the buyer of your work
  • At that moment we apply any relevant taxes (e.g. backup withholding if it applies)
  • At the next moment, we charge you our author fee. You have an invoice every month as documentation that you paid Envato these author fees, like any other expense you might incur in the course of your business
  • Still later if you withdraw to a bank account, you’d incur another fee – the SWIFT fee

Because of the magic of technology, the first three steps happen virtually instantenously, but that’s the sequence. When reporting your total royalty revenue, we report the total of all the sales, before taxes and before our author fees, before swift fees, before purchases you make, etc.

You should talk to your tax advisor or accountant, and keep records of the author fee invoices we provide you in the statement section of your account, and if you make purchases from your account, you should keep copies of the invoices you receive for those purchases.

For people in the US already doing their finances the way they should, this shouldn't be a big deal; but people doing their finances properly is a big assumption.

For non-US sellers selling to US based customers, it is not as easy of a situation. Envato is collecting the Royalty Withholding Tax:

From January 1st, 2016, when you sell to a US buyer, we’ll apply US Royalty Withholding Tax (US RWHT) on those sales only.

US RWHT rates range from 0% up to 30%, and depend on your country of residence and whether there is a tax treaty between your country and the US. We will apply US RWHT only on those sales made to US buyers.

I've never even heard of this tax until now. The IRS describes it pretty well actually, but basically a US based corporation that pays foreign individuals (IE an Envato marketplace non-US seller) “source income” from a buyer (US-based Envato buyer) must withhold up to 30% of that income. Since it's taken after the item price, it means non-US sellers are losing up to 30% of their income.

Fortunately for non-US sellers, Envato says most countries allow this withholding to be applied as a tax credit, so they should recoup some of it, but in the Envato forums it is (understandably) not popular right now.

Why incorporate in the US?

The big question to me is why should Envato incorporate in the US now? They say it's to grow, to provide better payment methods, and encourage higher conversion methods.

From a payments standpoint, I guess payment options are more limited than I thought for Australia:

Payment methods are the main change you’ll see. We’re aiming to introduce more options for US buyers. Currently we turn away qualified buyers because of our limited options.

All users (US and non-US) will continue to interact with Envato Pty Ltd (in Australia), but our US company will help Envato Market take payments from and make payments to US users.

I'm not really sure what specific options this opens up, but I presume we'll see more announcements in the coming months.

My gut also tells me that a potential benefit to incorporation in the US makes Envato more attractive as an investment opportunity for US-based firms. Envato is bootstrapped, and has done incredibly well being so, but a US based arm of their company could at least offer the opportunity for more interest from US based capital.

Australia has the world's 12th largest GDP, about the size of Texas' and a little more than half the size of California's. And in my very small amount of research, the capital markets in Australia are nowhere close to the scale of what's possible in the US.

I don't know that Envato would ever take money, but if they wanted to, having an arm of their company in the US would certainly make it easier to take US investments and help with that growth Collis talked about.