The new European VAT rules rolled out at the beginning of January, and they really complicate selling digital goods to Europeans. I have done a ton of research and reading, and this is the most straightforward post I could make from it to try and wrap up the state of the EU VAT rules for WordPress business owners and eCommerce shops.
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.
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.”
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.
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:
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.
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.
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?
|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%|
I guess the numbers aren't terribly surprising, though I am quite surprised by how many Europeans are not complying.
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.