On January 1st, the EU rolled out some new rules for handling the VAT (Value-Added Tax). Let’s start with the obvious: I’m not a lawyer or accountant and this post is just me chit chatting and doesn’t constitute any official form of advice or whatever other legal disclaimer you need, consider this it.
For most non-Europeans, the VAT may be unfamiliar, but it is relatively similar to an American sales tax. Until now, non-European businesses could basically ignore VAT (unless they have a European office), and Europeans were able to utilize the VAT rate of their home office. Now, that’s changing.
Big companies from outside the EU, of course, found some nice loopholes to avoid high VAT rates even when they have a place of business in Europe; they did so by registering their EU operations in Luxembourg, where the VAT rate is lowest. Then, they only had to pay the Luxembourg rate, no matter who they sold to in the EU. The EU is now changing the rules so that the VAT rate of the consumer’s purchasing location is the rate applied, no matter where the merchant is from.
General VAT information
Getting easy to read information on VAT is hard. The purpose of this post is to provide that sort of information within the context of WordPress. However, for the best way to read VAT stuff in general, I’d recommend VAT Live.
Impact on European businesses
This, in a nutshell, is the big deal. Previously, European merchants knew their own VAT rate and applied that rate to everyone they needed to apply it to. Now there are something like 28 different rates in the EU and merchants have to apply them based on the purchaser, not themselves.
For EU merchants, this sucks. Starting two weeks ago, they now have to track a whole lot of stuff and (theoretically) pay taxes to all sorts of entities. The EU has organizations that help with this, and now there are businesses like Taxamo that are helping handle the calculations and whatnot for these merchants.
However, it appears actually complying is hard for small businesses and large so far. For Europeans, these rules are a complete mess and is truly going to screw up the digital good economy for European merchants.
Impact on non-European businesses
For non-European businesses, the new VAT rules are a lot fuzzier.
In short, nothing has changed. There have been European rules in place since 2003 saying that non-European merchants should pay VAT when selling to European consumers — even for digital goods. The thing is: they didn’t enforce this because non-Europeans obviously aren’t under jurisdiction of European authorities.
So, most merchants not in Europe — but selling to Europeans — have ignored existing rules for years, and we still can. But there is a but. According to some places I’m reading, there is the potential that American and other non-European governments could cooperate and even enforce European VAT rules on its citizens.
Is this likely? Heck if I know. I honestly can’t decide if companies like Taxamo are just trying to churn up fear to get more customers (which is natural) or if Americans and other non-Europeans should really pay attention to VAT.
My gut tells me this policy is terrible and won’t last, at least without some kind of revenue floor (like 1 million Euros or the equivalent per year, or something). But that change could be years in the making. What until then?
The determining factors and implications
In the end, it really depends on how willing you are to roll the dice. In my heart of hearts, I hate the idea of paying a foreign government tax revenue for a digitial good when they have no jurisdiction over me.
Even “digital good” is hard to define, though the UK attempts to define qualified services in this document.
I mean, I don’t even have to charge sales tax to other states in the US when Americans buy from me. Ugh. So, I really, really want to just ignore the EU — as an American at least — and tell them to screw off and catch me if they can.
But.
There are a few buts this time.
1) It is risky. Because it is possible that the IRS will collaborate with EU member states to collect tax revenue from American digital merchants, as companies like Taxamo suggest can/will happen. I don’t want to get hit with some kind of audit or fine from the IRS years down the road.
A friend did make a good point to me recently, noting that the IRS barely enforces digital goods taxes in the United States, so why would they do so on behalf of a foreign entity?
2) Are European buyers breaking the law if I don’t comply as a seller? I don’t know, but a friend of mine that is complying brought that up. I can’t find much documentation on this front, but I wouldn’t want to cause European customers to break their laws by buying from me if I don’t comply.
3) It makes my product more expensive to European buyers if I comply, and it hurts my feelings as an American (Boston tea party, man!), but realistically, services will — and already are — come to save the EU with relatively simple ways to comply.
Enforcement and methods for complying
From what I can tell, each EU member state has to do its own collecting and enforcing. The EU is the regulating body but not the ones that will put feet on pavement to go and enforce these rules and taxes.
The safe bet seems to be to pay up and deal with it. But I have a feeling you could ignore these rules (if you aren’t European) and probably get by just fine.
Alternatively, non-EU merchants could just ignore the EU and don’t sell to anyone there. Well, I won’t do that. I have a lot of EU-based readers and (potentially) customers. But I am pissed about these rules; the European Union is hurting small businesses, and the worldwide economy.
I feel even worse for my EU-based friends. They don’t even have the option of ignoring EU member states. Penalties for non-compliance for them are even more frightening. They are being excluded as consumers of internationally distributed digital goods and also being pinned down as merchants by these overly cumbersome and irresponsibly drafted rules.
Self hosting eCommerce is even harder now
One additional implication of all of this is this: it is now even harder to self-host your eCommerce. If you sell at a marketplace like Etsy or ThemeForest, they can better (at least attempt to) manage the VAT rules and keep you safe. Though, from what I’ve heard, even some big marketplaces are struggling big-time with these new regulations.
If you sell on your own, you have to figure out new methods on your own or with your software of choice.
How to comply with VAT
Complying with VAT has turned into a business opportunity, and “solutions” are popping up.
No matter which solution you use, you’ll need to learn about VATMOSS. VATMOSS stands for Value-Added Tax Mini One Stop Shop. Basically, you can register with one EU country and thereafter just deal with that country for quarterly “returns” or payments.
If you go through the UK, they have information on registering for VATMOSS.
The EU member countries will divvy up the differences in taxes collected on their own.
For non-EU providers, VoES (VAT on Electronic Services) is also worth learning about if you’re providing “digital services.”
General needs
There are some general needs for your store if you’re going to comply with VAT
- Know if your style of eCommerce applies
- You need to know the country of origin for the buyer
- You need the buyer’s IP address
- You need the country of origin for the buyer’s credit card
Honestly, some WordPress plugins are playing catchup to make these things possible and / or easier.
In addition to information collection, information storage is also important. You’re supposed to store this stuff for up to ten years! You are also supposed to have ready-made reports for various authorities.
Some services are helping with the calculations, others with the whole gambit.
Taxamo
The number one player I’ve seen in the VAT compliance market is Taxamo. They are working hard to market their product, which identifies the consumer’s country, applies the appropriate VAT, integrates with your eCommerce application, stores and creates reports of your data, and fills out a quarterly return form on your behalf. They do so for 0.20 Euros per transaction, once you surpass 20 transactions per month.
Taxamo is trying to handle pretty much every part of the handshake for you, from collecting to reporting. Here’s their flow:
Taxamo has a few integrations:
Taxamo for Restrict Content Pro
Taxamo for Easy Digital Downloads
EU VAT API
The EU VAT API is more hands-on, but probably a nice option for developers looking for a minimilist solution. Developed by Radish Concepts (savvy readers may recognize WordPress community member Coen Jacobs, who works with Radish), the EU VAT API is a simple, but seemingly elegant solution for the calculation of the various EU VAT rates.
The EU VAT API has WordPress integration plugins for both WooCommerce and Easy Digital Downloads.
edit: Coen Jacobs tells me that like Taxamo, the EU VAT API also handles more than just rates, but they haven’t fully documented all of the other features yet.
Other methods
The VAT API is another simple API that looks good, but I don’t know as much about it.
Compliance with specific eCommerce systems
The big WordPress eCommerce players pretty much all have VAT compliance methods in place by now:
WooCommerce – they’re heavily on the Taxamo bandwagon, and have this extension. But there’s also the Radish Concepts one noted earlier.They also have a super slim extension where customers can enter an EU VAT number, that uses an API to calculate the cost. There’s a free plugin on WordPress.org too. Also, WooCommerce 2.3 is beefing up some features that will make it better capable for handling some of the more nuanced VAT rules.
Easy Digital Downloads – Has a lot of options. Here’s their site tag for “VAT” that lists the options.
WP E-Commerce – Has one coming, but it’s not complete yet.
Jigoshop – I can’t find any references to the new VAT rules, but since these guys are based in Europe, surely they either have something or are working on it.
iThemes Exchange – Has what appears to be an in-house VAT add-on, up to date for 2015.
Who is complying so far?
I was interested in who is actually complying with the new VAT rules so far — both Europeans and non-Europeans.
I’ve received 120 votes from shop owners selling digital goods in my poll. I think that’s a pretty great response. Here are the results:
Question: Do you have an eCommerce store that sells digital goods? Are you complying with the new EU VAT rules?
| Option | Count | % |
|---|---|---|
| I’m a European merchant and complying with new VAT rules | 27 | 22.5% |
| I’m a European merchant and not yet complying with new VAT rules | 20 | 16.67% |
| I’m a non-European merchant and complying with new VAT rules for European customers | 6 | 5% |
| I’m a non-European merchant and not complying with new VAT rules for European customers | 31 | 25.83% |
| I’m a non-European merchant and I no longer sell to European customers | 12 | 10% |
| I don’t know what you’re talking about | 3 | 2.5% |
| I haven’t decided what to do yet | 11 | 9.17% |
| Other: | 10 | 8.33% |
I guess the numbers aren’t terribly surprising, though I am quite surprised by how many Europeans are not complying.
Now what?
I think most of us will agree that these rules suck. The most organized thing I’ve seen to protest them is the EU VAT Action site. You should go there and see how to petition and participate in the debate if you are upset by these changes.
Quite personally, I have to figure out what to do. My primary reasoning for doing this research was to decide if I need to comply. I wanted to share what I’ve learned with you.
In addition to the poll I did, I also asked some friends running businesses. I think you’d be surprised just how many “big” American companies aren’t complying (big in the sense of the WordPress space).
It does keep coming back to me, what one friend told me about how easy it was to register for VATMOSS and get his shop setup though. I guess I have a few more days to decide.
If you haven’t figured out what you’re going to do with your shop yet, I hope this has helped. If you plan to sell some digital goods in the future, this should be a decent guide to get the lay of the land in terms of selling digital goods with WordPress and complying with the new European VAT rules.
I’m glad you brought up the Boston Tea Party. I referred to that when I was last asked about the new laws. Not paying taxes to some European country is about the most American thing you can do if your business operates in the U.S.
Next thing you know the EU will be asking Disney to collect VAT on an ice cream cone purchased at EPCOT.
Great article Brian,
the advice we have received form our Accountants is that the new VAT laws only apply to B2C (business to consumer) transactions, so if you’re selling plugins or themes to other business, it does not apply.
That’s correct. Mind you, that in order to be a valid business to business (B2B) purchase, the buyer needs to provide a valid VAT number, otherwise it is a regular business to customer (B2C) order, even if the customer is actually a company
Kind of – Place of supply for B2B has been the state of consumption for years. These changes bring B2C into line. But you wouldn’t need store any proof of location, just the business’ VAT ID.
The EU VAT thing is a big mess, and the handling of it from the UK government in terms of awareness and preparation has been pathetic. I suspect the law will either be ignored or amended. But I am not so sure as others that it will be discarded very quickly.
The EU is primarily an economic union, and its federal system is far more politically contested and insecure than Americans are likely to understand. In the US you get the odd {$state}-should-secede-from-the-US group here and there. In the EU, member-state exits are a significant worry in a few cases. I’d still say unlikely. But nothing to thumb your nose at. The British Prime Minister has promised an in/out referendum in 2015 — something he is probably regretting after the Scottish one nearly slipped out of his grasp.
What does this have to do with the new VAT law? The law is part of a battle over the idea of winners and losers in the EU system. Who is paying in too much and who is not getting what’s owed them and who is deliberately going where to escape paying up (eg – Google Ireland)? In the US, contests over control of the tax system have largely been settled. We have a pretty settled notion of what taxes the states control and what taxes the federal government controls. The EU is still working out a lot of details, but I don’t expect the member states to just be happy about forgoing tax income on a growing segment of the economy. In the US, we came close to passing a similar bill.
The issue at stake in the EU is that there are wildly different VAT thresholds across the union, so instead of setting a reasonable threshold for the EU law they just set it to the lowest common denominator — literally zero. That’s part of the compromising that goes into a weak union. It’s troubling plenty of people in the EU, but I’d agree with those that say a union is better than none. What I hope will happen is that this bill will initiate a process in which those thresholds can be rationalised across different jurisdictions. But the reason the UK feels it so hard is because its threshold is way higher than some other jurisdictions.
And lastly, really guys? The Boston Tea Party? Don’t be daft (I learned that word here in the UK). If you think the US is getting stiffed in the economy of global transfers, you’re insane. Read up on seigniorage for a start.
Coming next, US sales tax for EU businesses selling into the US
Yup. I’m surprised this isn’t a thing yet.
Confirmed, it only applies to B2C.
Unfortunately (as with everything around this ridiculous law) it’s not that simple: the business has to provide you with a VAT number. If it’s a sole trader or small company that is not VAT registered (which is very common in the UK, even for limited companies), or you don’t collect the VAT number as part of the transaction, then under these rules it appears it’s treated as a B2C transaction.
No, they don’t. At least in all my research through EU docs (and I’ve done a lot during development of our own WooCommerce extension) I haven’t read anything indicating they would. In general, European regulation of commerce is very focussed on protecting consumers, so it would be very untypical if consumers were to be charged for non-compliant sellers.
Yup collection and payment of VAT is the responsibility of the seller.
Great post Brian.
I’m not surprised to see the really low numbers in implementing the new VAT laws – even by EU merchants (Even the Italian government missed the deadline :)).
But I don’t think this will go away anytime soon. EU states *really* want this – to the point that they compensated Luxembourg for the changes. Let that sink in: they compensated a state for actively encouraging tax evasion. You won’t be suprised to learn Luxembourg upped their rates in January either.
But looking ahead I think we’ll see more of this. I read this week of murmurings of Canada doing something similar. As this grows it’ll become increasingly likely that states will cooperate to catch offenders.
In terms of repercussions for non-compliance of non-eu merchants -there is also the point that if you are ever bought out by an eu company or wish to expand there you’ll be subject to audits. (But if your small enough for EU tax authorities to not care about hunting you down, you’re probably not going to be setting up shop in Europe anytime soon)
As for my businesses its too early to say what affect it will have (about 44% of customers being in the EU) – but December was the best month of last year and January is set to be down on last January…
And all this from the EU whose raison d’être is to create a single marketplace. It is effectively forcing merchants to charge Danish customers more than German customers. (That or eat into profits),
And get this – there is no official VAT rate API. The closest thing is a PDF on the Commission’s website… which was out of date for the first two weeks of this year.
(Ok , that derailed into a minor rant, sorry :)),
Hi,
There’s another free plugin on wordpress.org, other than the one mentioned – my one: https://wordpress.org/plugins/woocommerce-eu-vat-compliance/
Best wishes,
David
Yeah this is mess. From a personal point of view, I am just preventing EU visitors from buying from my site, using Mika’s EDD – Prevent EU Checkout plugin, although I’m thinking of moving to Taxamo when I get a chance.
Also, I can confirm that Envato is taking care of the EU VAT compliance for anyone selling on ThemeForest or CodeCanyon – though I believe the functionality is still in final testing right now.
I can’t see why anyone outside the EU (plus some closely connected countries) would bother complying with this garbage. Most countries struggle to collect their own tax, let alone tax for another country. If I were a small business owner outside the EU, I’d just ignore it and assume I’d never get caught. The worst case scenario is that they come ask you for back-tax at a later date, but that seems like a risk worth taking here.
I’m with Ryan on this one. I doubt that anyone other than, say the UK and Germany, will pay any attention to the vat mess – France is openly ignoring that, and so do other countries around. Eastern Europe didn’t catch up with that at all, 90% of the people around haven’t heard about the regulations at at, and no legal mechanism could be implemented in the next 2-3 years probably.
Rejecting sales to Europe from the US or Australia does not make any sense to me. Not to mention that I’ll just pick “US” as location whenever needed since I don’t expect a package at my door.
Haha, you guys are optimists! The problem is if they do come after you, they’ll back date it and charge interest etc. I do agree it seems pretty low risk at the moment, but I’ve been screwed over before with international tax treaty arrangements, so personally I’m not taking the risk.
Also, the reason I’m just blocking EU visitors from purchasing is because I only get about 1 sale per month, so there’s very little incentive to get things set up properly (or to risk non-compliance for that matter). It’s really not a business at all, just a hobby at this point. If I ever ramp it up, I’ll get a proper solution in place.
And for what it’s worth, I fully expect people will do what Mario suggests and just use a US IP address. There’s so many holes in the EU’s plan for this.
Yep, that’s the main thing here. Even if you would ignore the rules now, because they can’t/won’t enforce them now, you will get fined for all these years where you didn’t comply with these new rules.
That’s understandable if you don’t get any (almost) EU clients at all, and it doesn’t quite affect you to be honest. Other than that, I think that it’s way too early to close shops when it’s so contradictory – my assumption is that this will be amended as Nate said in the next few months. Even if it stays the same, there would likely be various options to work around this, but odds are that the EU will ban the dumb idea or figure out a decent way out.
In case this doesn’t happen, you can still close the shop. Worst-case scenario, you’ve sold a few thousand bucks and you’ll have to pay a small fine few years later (if you are really, really, really unlucky and someone from the tax department gets so bored that they knock your door specifically).
It doesn’t work for large shops, but those can already invest in vatmoss integration or so.
P.S. I hate the idea, but our laws here have been quite similar for a while – we don’t have a legal way to do B2C online internationally, and have 3 or 4 different regulations for those orders and need to track and report them separately. That said, very few have been affected (the larger folks) over the past 6-7 years and it is a gray area – gray enough to risk both sides – a collective lawsuit from several eStores here against the chamber of commerce and ministry of finances vs the logical IRS attack.
I think the thing is, at some point the US tax authorities might decide something similar in reverse – that EU sellers should collect US taxes, and send them to US tax authorities. And then a US-EU treaty agreement will be made, so that each will enforce the other’s taxes…
I agree it’s wrong, though. Non-citizens of a country outside its territory should not have to care about of that country’s laws. When you’re potentially liable to foreign countries’ laws, then you’ve basically got a petty tyranny – only big companies will have the resources to be able to comply, and the small man will be driven out of business. So, if it gets proposed, I don’t expect the businesses with deep pockets to be fighting very hard against it, sadly…
I imagine before that happening, all businesses in the US would have to be required to collect sales tax for 40+ states rather than just their own, as it is now. That would be a giant mess of its own.
Also, who said that EU countries have any kind of jurisdiction to charge me or any other people from outside EU, any taxes at all?
You, as store owner, are not being charged the tax. The customer, who lives in the EU, is being charged the tax. You just need to collect it and send it to the appropriate government.
That’s a fine distinction I know, but it’s important. It’s still ridiculous.
That is actually the most important piece of information in this whole discussion. 🙂
This is aimed at big business, not the small trader. Companies like Amazon have been thumbing their noses up at the tax authorities for years. This is their come uppence.
You don’t mention the VAT threshold, i.e. small businesses only have to register for VAT once their turnover reaches a certain level. Used to be about the equivalent of around $100,000 dollars in the UK.
It’s also about having a level playing field for business. Why should companies outside the EU have the competitive advantage of not charging VAT, when their direct competitors within the EU have to pay it.
The problem is the threshold is now $0. Every single small business is supposed to collect VAT, even if they only made one $10 sale to the EU in a year. Ridiculous. If they had a reasonable threshold, then this wouldn’t be anywhere near such a big problem.
I forget the exact rule – I think if you are in the UK and the customer is in the UK, then the old UK threshold still stands. But for customers outside the UK, you have to start collecting VAT immediately, with no threshold. I might have got that a little wrong, but it’s something like that.
As far as I understand it that is correct. However, that becomes null and void once your business registers for VAT. So, as a UK sole trader, if I never register for VAT and sell only to UK or non-EU customers, I am eligible for the threshold. But if I register for VAT to be compliant when selling to EU customers, that means I have forfeited my VAT exemption and have to charge VAT for UK customers.
^ That’s as far as I understand it, which isn’t necessarily that far.
Wow, as soon as I posted this I just read the HMRC site that says the opposite.
HMRC VATMOSS guide
Nate: HMRC did a turn-around at the end of last year. The situation was going to be as you first thought; then they responded to some push-back.
The risk with VATMOSS is that Europe, and its member states, start demanding the reciprocity that the US promised them when it held a gun to the head of every country in the world and ordered them to comply with the US global FATCA tax regime.
(This is the point where most Americans inevitably say “the what?” Sigh. Look it up.)
Foreign tax authorities and banks have had to spend millions of pounds and euros out of their own pockets to come into compliance with a vengeful US extraterritorial tax law. At some point they’re going to want to claw that money back.
I wonder what Patrick Henry would think of this.
Actually, I don’t. And he’s right.
Thanks Brian for excellent summary.
Most of the people seems really angry about this EU VAT law. I know I was. It makes selling e-stuff more complicated. But I’m gonna look at this from another angle, other side of the coin.
I love paying taxes. That’s what makes my country Finland so great place to live. We have public education, health care, you name it, we got it. And that is mostly because we pay taxes for every step we take, for every breath we take.
Naturally we have gray economy here also and some individuals or companies don’t pay taxes. Or they do everything they can not to pay as much they should. I’ll assume that in many other EU countries we have a lot more these “Tax fugitives”. They are not my biggest friends.
I do hope that EU VAT law will go away. It will probably end my own shop. But in the meanwhile I do everything I can that I can pay taxes for different EU countries. It’s my job to make it as easy as possible for customers and for EU tax department.
Downside is that people inside EU have to pay more about the product than outside of EU. And also inside EU tax rates varies a lot.
I’ll note that there are a few companies that act as the point of sale and handle all these taxes for you for digital sales and subscriptions.
Fastspring http://www.fastspring.com/vat
Paddle http://blog.paddle.com/how-to-deal-with-new-eu-vat-regulations/
are a couple.
These companies take a bigger percentage of the sale but save you the tax and administration headache.
On a related note, this week I noticed that a WordPress theme shop based in the UK switched from selling directly on their own site to selling via Creative Market and WordPress.com only, in part to avoid having to deal with VAT compliance themselves.
Thanks for mentioning Paddle.com John! We do indeed handle VAT on behalf of our sellers; Paddle is effectively the reseller of your product, or the ‘merchant of record’, and that removes you from the VAT scope altogether.
We charge 5% + 50¢ per sale, but for that price we offer: a beautiful checkout experience for your website; an insightful analytics dashboard; file hosting + delivery; we’ll manage your customer support and best of all, we manage VAT too.
If you’re looking for a way out of VAT MOSS, feel free to drop me a line: fabio[at]paddle.com
I’m siding towards the “churn up fear” argument, because the truth of the matter is that there’s no way in hell the IRS has any reason to assist European states in moving money out of the country. It is simply not in our best interests to do that sort of thing, and frankly the IRS has other problems to deal with.
If you’re in the US and you have no reason to be under the jurisdiction of any EU government, I’d forget about it. Same old stuff applies, until such time as it actually changes. Which it won’t be anytime soon.
If it were to happen, I wonder how much the selection of digital goods available to Europeans would shrink.
It’s funny you should mention jurisdiction, since IRS has already exercised jurisdiction ACROSS THE PLANET with the FATCA.
http://www.cnbc.com/id/101726971#.
The rules of the game are simple: Give up the client information or face steep penalties if you ever try to do business in the USA.
There’s a lot of money involved on both sides of the Atlantic. Even though the EU countries have to pursue the VAT issue individually, It’s not hard to see IRS and EU members coming to an agreement, especially since VAT would not be coming out of US pockets, but it will be funneled out of EU pockets back into EU.