Collect Tax All Over The World? What The...?!, New international tax law on digital svc Options

[copywriter]

Hey,

I was just in touch with ClickBank about someone who ordered my [url=http://www.highrankings.com/copywritingcourse]Copywriting Course[/url] (because the amount looked funny). This is what they sent me. Oh my gosh!!

Does anybody have any solid facts about what is considered a digital service in these people's eyes?

Is providing SEO, SEM, Copywriting a digital service? I hope not!!


VAT Tax Frequently Asked Questions


Beginning July 1, 2003 all sellers of digitally-delivered products and services are required by law (known as E-Commerce Directive 2002/38/EC or the “Directive”) to collect VAT taxes if the buyer resides in one of the European Community (EC) countries. ClickBank, like all sellers, must comply with the law.


What is “VAT”?
VAT (Value-Added Tax) is similar to a national sales tax. European consumers are used to paying VAT on nearly everything they purchase. The new Directive extends VAT taxation to goods and services sold to Europeans over the Internet.


Must sellers located in the EC also collect and remit VAT?
Yes. The law states that VAT must be collected from any BUYER residing in the EC regardless of the location of the seller. EC sellers have been collecting VAT from EC buyers now for some time. The new law extends the collection obligation to non-EC sellers, and is intended to level the playing field between EC and non-EC sellers.


What are the tax rates?
The tax rate may change from time to time and varies from approximately 15% to 25%, depending on the country. As of July 1, 2003, the VAT rates are:

AT Austria 20.0%
BE Belgium 21.0%
DK Denmark 25.0%
FI Finland 22.0%
FR France 19.6%
DE Germany 16.0%
GR Greece 18.0%
IE Ireland 21.0%
IT Italy 20.0%
LU Luxembourg 15.0%
NL Netherlands 19.0%
PT Portugal 19.0%
ES Spain 16.0%
SE Sweden 25.0%
GB Great Britain 17.5%


What is required of the seller?
In order that a seller can properly account for the calculation, collection, and remittance of the VAT, the following operational tasks must be undertaken:

1. Determine in real-time the residency of all consumers to determine if the transaction is taxable and at what rate.
2. Maintain rate tables for each country and region where VAT applies.
3. Run tests to validate the consumer-entered and system-collected data and confirm the VAT liability.
4. Present the buyer with the full amount of the transaction, including any applicable VAT.
5. Store transaction level details sufficient to file a quarterly VAT return and remit the amount due.
6. Retain these records for up to ten years for audit purposes.


Karon

[qwerty]

They can charge a VAT for products sold by vendors outside the EU? How do they intend to collect?

[mcanerin]

I have no idea how they expect to do that - presumably they Buyer must report everything they buy to the EU and pay taxes on it... Yes, yes, I can see how everyone would make sure they do that. Yup. You bet.

So make sure you let the seller know that you live for 6 months and one day a year in Upper Volta (IMG:http://www.highrankings.com/forum/style_emoticons/default/wink.gif)

This is why I own an offshore company (not in Upper Volta, though - I don't even think that's the name of the country anymore) (IMG:http://www.highrankings.com/forum/style_emoticons/default/smile.gif) After all, I may be resident in Canada, but my company is not, so anything bought through it is based on it's residency.

This is the most idiodic law I've seen for a while. If you pass a law that is unenforcable, then it's hard to respect other laws as well. Who taught these guys? Personally, I wouldn't pay until it has been challenged in court and been upheld. An invalid law is invalid from the day it's passed, not from the day it's been found to be invalid. Though if it is upheld you'd be responsible for paying the tax plus any fines, etc. Lots of businesses will end up paying just to avoid that.

As to leveling the playing field, if you abuse one group of people through laws and taxes, the answer to them being upset about it is NOT to start abusing everyone else, as well.

Oh well. And I thought my government was bad...

Ian

This post has been edited by mcanerin: Aug 28 2003, 03:59 PM

[compar]

If you pass a law that is unenforcable (and this probably isn't) then it's hard to respect other laws as well.

Ian, I couldn't resist isn't that a double negative? If it isn't unenforcable then I believe it is enforcable. (IMG:http://www.highrankings.com/forum/style_emoticons/default/lol.gif)

Ok Ok I know what you meant. Now to the subject at hand. I take it that Karon is selling through ClickBank or otherwise using them to collect payment from European customers. If this is the case and ClickBank wants to continue in this business they will have to abide by the laws of the countries in which they are carrying out commerce.

And yes a VAT or value added tax can be charged on any goods or services so no matter what the format. The material Karon is selling it can be subject to a VAT tax. So I believe that ClickBank is probably going to net off the applicable taxes before remitting the payment to Karon. If I have this correct then Karon's only option is to raise her price on items sold to these countries.

[compar]

BTW if you think Karon's case is strange look what the state of Florida just announced. The intend to place a tax on LANs and networks.

[deborah2002]

Oh terrific! Now I have to go break the news to my boss.............................. (IMG:http://www.highrankings.com/forum/style_emoticons/default/mf_type.gif) then again, maybe I'll just email the link......


deb

[mcanerin]

Hi Bob,

You're right, double negative <oops> I've corrected it. So now "I ain't used no double negatives" and you can quote me (IMG:http://www.highrankings.com/forum/style_emoticons/default/smile.gif)

Yes, there is no doubt that Clicktracks will skim on the governments behalf, so your only option is to raise your prices. I hate that.

It's been coming for a while, though. You can't put something successful, useful and profitable in front of a politician without them wanting to tax it. Maybe they think it will make THEM successful, useful and profitable, like eating the heart of your enemy to get his courage, or whatever. (IMG:http://www.highrankings.com/forum/style_emoticons/default/tongue.gif)

Ian

[copywriter]

No... ClickBank has their end (and by default my "ebook selling end" ) covered (IMG:http://www.highrankings.com/forum/style_emoticons/default/biggrin.gif) What *I* want to know is how do I find out if copywriting is considered a "digital service?"

I've visited links to these other "authorities," but they don't seem to specify one way or the other.

[compar]

No... ClickBank has their end (and by default my "ebook selling end" ) covered  (IMG:http://www.highrankings.com/forum/style_emoticons/default/biggrin.gif) What *I* want to know is how do I find out if copywriting is considered a "digital service?"

I've visited links to these other "authorities," but they don't seem to specify one way or the other.

I doubt that it matters if it is "digital" or not. It is a service. How does it differ from consulting or ghost writing or a variety of other services? And as such I'm sure it will be taxable under a VAT tax. After all VAT stands for Value Added Tax. Doesn't your copywriting add value? I certainly hope so otherwise what are you charging for?

If you are searching for the specific category and level of taxes I wouldn't search under digital, I'd search under writing advertising copy or possible even web site programming and design.

Then we come back to Ian's question if you are contracting to provide these services direct with European customers how are the European government going to extract the tax from you. You are not a registered business and do not file tax returns in those jurisdictions. So just ignore them.

[mcanerin]

Ahh - that falls under the "preponderance" rule. Which, like most legal rules, is so vague and full of exceptions that it keeps lawyers rich, err, busy helping people....

If your work is basically done "offline" and the digital aspect is fairly incidental to the work, then it is not "digital services".

For example, in your case, if someone contacts you by email and asks you to write an article for them, then you email it, it's likely NOT a digital service, since all the "work" was done "offline". This would be the same as if you bought something off of eBay - even though all the negotiations were electronic, the service is essentially just an auction, and the use of the internet is basically the same as the use of the telephone and the fax machine.

On the other hand, if the operation of the internet or the servers, were very important to the process, then it would be a digital service. The fact that your eBook is digital, is found on a website, is sold and processed on a website, and is delivered to the customer with very little involvement from you, makes it a "digital service. Even though the original writing of it may not have been.

Is there a hard and fast rule? No. Exceptions? Yes. I can't tell you for sure, since it's a legislative rule and not a judicial rule, and therefore doesn't actually have to make sense. The people in charge of administering it would be the final say, in most cases (though you are entitled to argue it, or course).

Quick List
(Ian's Legal Opinions and may be totally Wrong for your Jurisdiction)

Digital Services

Email Newsletters (if paid for)
Affiliate Links and Programs
eBooks and Software delivered primarily through the internet
eServices (like wordtracker, google, ad-words, etc)
Most eCommerce and web shops.

Non- Digital Services

Writing an article that ends up on a site, but wasn't intended for a website
Using a website to collect leads or to send info to sales staff
Network Administration
Computer Fix-it
Word processing
Most Virtual Assistant services

Borderline (iffy)

Copywriting for a website page or email letter
Website Design
SEM and SEO


Basically, if your website is kind of a virtual employee that actively sells and processes, it's a digital service, if the site is mostly an ad or or information device, it's not.

Since this is an SEO forum I know the "Borderline" heading is annoying, but that one is a judgment call. Since a human is doing all the work and the result is just digital, I would argue its not a digital service. However, there can be a case made for the fact that the whole and only reason for the service is for websites, therefore it's digital. I don't believe it is, personally.

My opinion,
Ian

[copywriter]

Well, it makes specific reference to "digital" products and services. So, that's why I was curious about copywriting.

Ian... as long as we're theorizing (IMG:http://www.highrankings.com/forum/style_emoticons/default/biggrin.gif) I'd disagree that Web design (done completely for a digital medium) and SEO (also done exclusively for a digital medium) would be "non" or "iffy" services.

And virtual assisting (done completely through virtual means - i.e., mostly the Web) would not fall into the "not" category.

GEEZZZ! I'm so confused! (IMG:http://www.highrankings.com/forum/style_emoticons/default/wacko.gif)

Maybe I'd better just call my CPA and be sure.

Then there is the issue of enforcement that someone (not sure who... think it was Ian and his double-negative (IMG:http://www.highrankings.com/forum/style_emoticons/default/lmao.gif) ) brought up.

*Can* they, in fact, enforce this law with little folks? Or any folks?

I've got it! Here's the solution! (IMG:http://www.highrankings.com/forum/style_emoticons/default/drunk.gif)

[compar]

Maybe I'd better just call my CPA and be sure.

It is my bet that your CPA will know less about it than you do. This is all about offshore jurisdictions and transactions. Your CPA will have absolutely no experience. I personally would ignore the entire thing. But if you want help you are going to have to go to a Lawyer or an Accountant in the country that you are selling into.

But if you are not registered to do business in that country there is no way they can extract the tax from you.

Let me illustrate. I do substantial business with US customers, but my business is registered in Canada. I have never collected or remitted any local or regional US taxes.

A couple of years ago it seemed a good idea to have a US business bank account and to do this one must have a US address. So we registered to do business in Arizona and completed all the State application forms and requirements and "opened a office in Tucson" -- my brother in law is a part time web designer and he is our Tucson office.

The point of the story is that now we have to submit reports to the IRS and the State of Arizona and if we made a profit out of this office we would have to pay taxes. So again if you are not registered to do business in these VAT jurisdictions there is no way they can collect. Relax (IMG:http://www.highrankings.com/forum/style_emoticons/default/smile.gif)

[Mel]

HI all:

I find it very diffucult to believe the the EU is passing any regulations which affect sellers in countries where they have no jurisdiction.

But a quick search turns up the following on the European Union Taxation and Customs Union site (http://europa.eu.int/comm/taxation_customs/taxation/ecommerce/vat_en_faq.htm) regarding this new rule:

When a non-EU supplier sells to business customers in the Union (at least 90% of this market), there will in practice be no change and the VAT implications will be handled by the acquiring company in the EU under self-assessment arrangements
For the non-EU supplier whose EU customers are non-business individuals or organisations, there will now be an obligation to charge and account for VAT on these sales just as EU suppliers have to do.

I think these regulations are not valid in the US. At any rate they can pass all the regulations they want but how are they going to enforce them?

Since you are using Click Bank to sell your product, IMO Clickbank itself qualifies as an electronically delivered service and if they have decided to pay the VAT (though it appears that US entities have no legal obligations to do so) they will take care of the collection and payment and it will be transparent to you but your customers will see prices rise 20 to 30%.

But for others it raises a huge number of questions:

How do you verify the buyers location?
How do you verify that your buyers are individuals or companies?
Who is going to compensate you for the added costs of complying with this rule?

A link to a US artice on the tax: http://siliconvalley.internet.com/news/art...cle.php/2230401

[copywriter]

Hmmm... good points from both of you. Thanks.

Well, the majority of my business is conducted in the US. However, I have several clients in the UK, Germany, Austrailia and others.

OK... breathe a sigh of relief and go on about my business.

Thanks!

[mcanerin]

I went and read the FAQ, then the directives, just to see what is going on "from the horses mouth."

My favorite quote is:

For the non-EU supplier whose EU customers are non-business individuals or organisations, there will now be an obligation to charge and account for VAT on these sales just as EU suppliers have to do.

That's amazing! I didn't know that foreign countries and jurisdictions could pass laws on me! Wow! Does this mean that by drinking beer and therefore breaking all sorts of laws in fundamentalist countries that I should go turn myself in? I'll get right on it.

Now, to be fair, it's generally held that if you are getting income from activities in a country, you are obligated to pay tax to that country on that income, unless there is a tax treaty in place. The tax treaty is there so if, for example, you make $50 and get taxed in Britain, then you shouldn't also have to pay tax on the same $50 in the US (assuming you are a US resident). Usually the rule is that you pay the lessor tax, which is why Barbados is such a popular place to run a company from, since the corporate tax rate is from 1-2.5%. There is another rule that usually says that if you are in a jurisdiction that has NO tax, then you have to pay FULL tax to the other one. So a 1% tax is the best you can hope for, usually.

The leap here is that up to now the law of the owner of the website has been the governing tax jurisdiction, since the agreement to buy and the delivery of goods is on the server. Now they are basically saying that the agreement and delivery is on the desktop. That's a big difference.

Lets follow that logic. Right now in some countries it's illegal to show a photo of human face. Currently, if a resident of this country (who presumably voted for or is in some way accepting this government) goes to my site, and on the front page is my smiling face welcoming them, the resident has broken the law. Under this new logic, I'M the one who just broke the law! I've apparently gone over to their house (virtually) and shown them something illegal, and therefore while I'm there, I can be punished, etc.

Obviously this is nuts (though it's not a first, Germany and other countries have been trying this for some time by trying ban WWII mementos from eBay. Not that I like Nazi's, but come on! Apparently eBay caved in and put a bunch of programs in place to detect IP's and so forth. I wonder what will happen when Iran complains about photography studios....

I don't have an answer for this, like I said earlier there is no constitutional obligation for a law to make sense. Apparently it's illegal for a car to impersonate a wolf in Mass., and I know it's illegal to paint a wooden ladder in Alberta. <sigh> Also, if you have a bar here you must have a minimum of 2 horse hitches in front... Of course, everyone ignores it.

Ian