VAT: Discussion w/Zee Linden July 31-Aug 03 2008

You're invited to participate in this three day discussion. Zee will read all comments, and will periodically jump in and respond to comments as well. This conversation will be open for three days to provide Residents from all time zones time to participate. This thread will be closed for comments on August 03. Thank you! -- Katt Linden


“No one likes paying taxes”

“But in this world nothing can be said to be certain, except death and taxes.”
-- Benjamin Franklin (1706 - 1790), Letter to Jean Baptiste Le Roy (1789)

Zee Linden says:
I noticed in the comments to M’s recent blog post that there were a number of questions and concerns about Linden Lab charging European residents VAT. Taxes are never a fun subject, but there was a lot of misinformation out there that I wanted to be sure was cleared up. I also wanted to create a forum where residents could discuss the issue & help each other with it.

I think most of the questions could be answered by my blog posted dated October 4th, 2007. The heart of the VAT issue comes from this European directive as described on this European web site. “VAT: Special Arrangements Applicable to Services Supplied Electronically” [" http://europa.eu/scadplus/leg/en/lvb/l31044.htm ".]

In the original blog post I tried to help parse what that site means and also lamented the fact that the VAT Special Arrangement was ironically meant to level the playing field for European businesses but has had the unintended consequence of un-leveling the playing field for European Second Life land owners. We agree, this is an unfortunate consequence. But we also believe that taxes that countries levy at the point of sale should be borne by residents of those countries.

As frequently happens with rapidly growing companies, prior to collecting and remitting VAT for the first time in Q4 of 2007, it’s clear that we were not in compliance with this VAT directive. We are currently in the process of clearing up our prior EU liability and we expect all of our back taxes to be paid by the end of the year.

Original blog post: [ http://blog.secondlife.com/2007/10/04/vat-are-you-talking-about/ ]

Lindenz!! Quick! Catch them!!

Sorry, Katt, I've got nothing useful to add here - wanted to say I'm happy to see y'all doing threads like this, though.

From Zee Linden's blog post "VAT are you talking about"
[" http://blog.secondlife.com/2007/10/04/vat-are-you-talking-about/ " ]

Many European Residents have asked for clarification about VAT (Value Added Tax) in Second Life and how it impacts them. While each case may be different, I’ve tried to answer the questions in the Knowledge Base [ " https://secondlife.com/support "] and to make it easier, I’ve also attached the VAT FAQ here
[ " http://lindenlab.files.wordpress.com/2007/10/vat_faq.pdf " ]

The questions fall into a few categories, which I will try to address in this post. I’ll also be available in-world at a Town Hall meeting on Monday October 8 at 11:00AM PDT at The Pooley Stage to answer additional questions as well. Please come prepared with voice enabled so you can hear, as I’ll be answering by voice and chat questions by voice to be more efficient with the time.

First there’s been some debate as to whether or not we have to charge VAT and why.

The best place to get full details about European legislation is at Europa [" http://europa.eu/ "], “the portal site of the European Union”. It provides up-to-date coverage of European Union affairs and all legislation currently in force or under discussion.

The relevant section on that site is called “VAT: Special Arrangements Applicable to Services Supplied Electronically”. [" http://europa.eu/scadplus/leg/en/lvb/l31044.htm "] The Directives were implemented to create a level playing field for European Union (EU) businesses with regard to the indirect taxation of electronic commerce. Essentially, prior to this Directive non-EU-based companies providing electronic services to EU customers had an advantage in that they were not required to charge those customers VAT:

“The objective of this Directive is to introduce new harmonised rules and thus eliminate distortions in competition for radio and television broadcasting services and electronically supplied services within the EU. The absence of a clear and fair tax regime was a disincentive to investment and put EU business at a competitive disadvantage.”

Second Life classifies as an electronically supplied service in the definition below:

“Electronically supplied services include services such as cultural, artistic, sporting, scientific, educational, entertainment, information and similar services as well as software, video games and computer services generally.”

Under the Directive, Linden Lab is required to register with the tax authority and then to charge non-business customers VAT at the rate prevalent in their EU country:

“Non-EU businesses are able to register with a tax authority in a Member State of their choosing. They are required to charge VAT to non-business customers in the EU according to the standard tax rate in the Member State where the customer lives.”

I’ll leave it to your local tax advisor to help you interpret its implications for you personally, but basically this means that companies that sell to EU consumers must charge VAT regardless of where the companies are domiciled. We understand that it was implemented to require companies, such as AOL, to charge VAT, just like domestic EU providers of similar services, so all could compete equally.

Ironically, this Directive was put in place to create a “level playing field” but in Second Life it may cause EU based virtual businesses inside Second Life to be less competitive. This is because the Directive was designed with a view that end customers are the final consumers of a particular electronic service. The tax authorities could not have imagined a service like Second Life which enables Residents to develop and sell land, content or other forms of intellectual property within an ecosystem even though they are not official VAT-registered businesses. This means a side effect of the law is that VAT could put those Residents at a disadvantage compared to non-EU counterparts.

Related to this question, we have been asked quite a bit why we haven’t charged VAT before now. The simple answer is that Linden Lab was able to absorb the cost of VAT on behalf of its EU customers. Our business in Europe has quadrupled each year since 2004 and already it has more than quadrupled in 2007 through September. As a result, we can no longer afford to absorb these costs for European Residents.

The next set of questions has been about how we determine who resides in the EU.

To comply with the EU Directive, we are obligated to take reasonable care to ensure that we have identified the actual residency of our consumers. This includes, but may not be limited to, self-reported country of residence, address of billing information including the address of the bank which issued the payment mechanism, IP address predominately used by the consumer and other mechanisms. This is the same set of information that we use evaluate the fraud potential of a particular user, so if this set of information doesn’t match, then it’s probable that we would put the account on hold until we could reconcile the differences.

The third category of questions has to do with VAT numbers and invoices. Second Life Residents who operate businesses may be eligible for a VAT exemption. If you are, you can provide us with your VAT number here [" https://secondlife.com/account/vat_enter_id.php "]. We will also provide you with invoices downloadable within your account page (this feature is coming soon) so you have records of the VAT you have paid us for your own tax reporting purposes. Our VAT number for your records is: EU826011179.

One of the most interesting questions is about why we don’t charge VAT on L$ purchases on the LindeX.

The LindeX is a marketplace where Residents can buy and sell L$ from and to each other. Because Linden Lab merely facilitates the transaction, we do not assess VAT on the purchase. Consumers are not normally responsible for collecting and remitting VAT between each other, but your situation may vary and you should consult a tax professional.

And finally, some residents have noted that Mainland Maintenance fees are charged in arrears. To lessen the burden, and to provide Mainland residents with some additional notice, we will be not be passing on the VAT charge until October 27th for mainland maintenance fees.

If you have more questions, I encourage you to download the VAT FAQ [" http://lindenlab.files.wordpress.com/2007/10/vat_faq.pdf "], refer to our knowledgebase, send me a message in-world, or come to the discussion Monday (again, please come prepared with voice enabled so you can hear, as I’ll be answering chat questions by voice to be most efficient with the time.) Of course, I can’t give you tax advice and nothing here should be taken as such. In summary, We’re obliged by law to charge EU Residents VAT. Hitherto we’ve paid it ourselves. As Second Life grows, that becomes less sustainable. Taxes are rarely popular, and I’m sorry to be the messenger for this one. By their very nature, they also distort markets as some Residents have noted. We did manage to shield our European Residents for a number of years, which I hope is some small comfort.

Why can't we pay tier inworld to avoid the VAT issue?

(1) Lindex Trading Limits reviews

On this page:

https://secure-web14.secondlife.com/currency/describe-limits.php

it says to submit a ticket, which will be reviewed in 5 days. In reality it takes 4-6 weeks to be reviewed. There is also this other page:

https://secure-web14.secondlife.com/currency/request-review.php

which seems to be a whole different method of requesting a review, and which does not seem to get any response. So the questions are (a) why are there two methods, and (b) why do you promise a 5 day review time which is not being met, and never has been as far as I can tell from past forum comments and my own experience?

(2) Economics statistics

Between yesterday and today, the number of islands dropped by 2000, and the L$ in circulation increased from 5.2 billion to 6.7 billion. Can that be right?

In a previous comment you said:

"Our business in Europe has quadrupled each year since 2004 and already it has more than quadrupled in 2007 through September. As a result, we can no longer afford to absorb these costs for European Residents."

That implies you paid VAT, but did not explicitly charge your customers for it.

Now you say:

"As frequently happens with rapidly growing companies, prior to collecting and remitting VAT for the first time in Q4 of 2007, it’s clear that we were not in compliance with this VAT directive. We are currently in the process of clearing up our prior EU liability and we expect all of our back taxes to be paid by the end of the year."

This implies you did NOT pay VAT.

One of these is not correct, or you need more explanation of exactly what happened.

My hypothesis: "we can no longer afford to absorb these costs" really means "our unpaid tax liability was growing exponentially, and the tax man is banging on the door demanding it gets paid NOW". In other words, you did not actually pay the taxes prior to Q4 2007, but since The EU player population had grown so large, you were being forced to change the pricing structure so that the future liabilities would stop growing.

Is VAT just the tip of the iceberg that will mean LL collecting all forms of taxes across the board for all governments? Where will the line be drawn?

HtB

Because it would be tax evasion...

a quick word in before the thread dies of boredom, from germany.

to be legally "able" to charge VAT from me, on behalf of the german tax authority, you guys from linden labs need:
1. a german VAT tax number
2. send me a printed invoice by mail that includes that vat id number.

so...

where is my printed invoice of this years premium account charges?

I need to ask you all to stay on the topic of VAT here, so this remains a useful discussion on that issue.

We can start another thread for your ideas on other topics of discussion....

Thank you!

Most legal experts agree that under British Law this would still be taxable. just as it would be if you paid with coffee beans or peanuts or the various local currencies
that appear all over. LETS; Local Exchange Trading System, Time Dollars and their Ilk.

All LL would do is muddy the waters making extra work for themselves and the taxman when the taxman caught up with them.

Does this mean you should declare your Lindens taking To the Taxman? Probably when they get round to it.

And yes they will get round to it.

I would expect most countries to have similar laws,

I would like add my vote to that-it's basically not legal in Germany *how* LL charges for VAT.

No it wouldn't and I have letters from, HMRC and government ministers saying that they don't consider payments made entirely within a virtual world to be services for the purposes of VAT.

HMRC currently beg to differ with what most legal experts agree. They could of course change their mind.

You note that the European VAT tax puts EU-based SL businesses at a disadvantage, because the tax authorities failed to anticipate anything like the SL economy.

What, if anything, is LL doing to get the tax authorities to change their stance? Any lobbying efforts in Brussels? It seems to me that the EU wouldn't even have to change the law...just grant SL and other similar services an exemption.

Along the same lines, what statistics has LL compiled that show the impact of VAT taxation on the SL economy? Sims sold, sims abandoned, residents leaving or going out of business? If you are not collecting this data, shame on you...you will need it to support the lobbying effort mentioned above.

I agree that Linden Lab should collect VAT but this is really unfair for the EU citizens who seem to be kicked out from the real estate business as some of us pay VAT up to 25% which automatically kicks us out of the competition against the Non-EU citizens. Why doesn’t Linden lab offer a lower/different tier fee system for the EU citizens which allows them to stay more competitive in the market?

Showing the value of the dollar also goes into this, I think..

http://finance.yahoo.com/currency/convert?from=EUR&to=USD&amt=1&t=2y

I came to SL from Britain. My view is simple. VAT is something we and and other EU citizens have to pay. There is no choice in the matter and that's the way it is.

Living in the UK and the introduction of VAT charges had a huge bareing on me deciding NOT to buy my own sim. I am sure this is also true for alot of other none US based SL residents.

I’m sorry Lindens but the price of buying and then running your own sim is simply beyond alot of us, especially as we never really “own” anything but are simply paying for server space and your costs in maintaining them.

As a side note I would be interested in knowing what it does cost Linden Labs to buy and maintain these servers and how much profit is made monthly from your tier fees…which to me are extortionate.

In the end owning a SIM and paying your tier fees is an individuals choice to make. Your pricing and monthly charging system made me choose not to.

Look forward to your response
(a happy parcel renter)

If I'm not mistaken VAT is levied at different rates in different countries within the EU.

Its possible for me to buy a product in a lower VAT rated EU country and I don't have to pay the difference.

If LL were VAT registered in the country applying the lowest rate it may help reduce the rate some SL residents pay.

Where is LL VAT registered and what rate do they apply??

Following quote from: http://www.scandicard.com/eu_vat_number.asp

""Low VAT rate on electronically supplied services
As from 1st July 2003, non-EU suppliers (with no establishment in the EU) providing electronically supplied services (ESS) to private individuals in the EU are required to be identified for VAT purposes in one Member State of their choice and charge VAT on these electronically supplied services at the rate applicable in the customer’s country of residence.

Instead of VAT-registering, by setting up an establishment in Luxembourg, non-EU suppliers will charge their EU customers only with Luxembourg VAT at 15%. Applying this unique rate of 15%, which is the lowest in the European Union, represents a considerable advantages for the supplier. Furthermore, this simplified process makes pricing easier and independent from the private individual’s country of residence.

As per the European directive regarding the status of the VAT for the transactions issued through e-commerce within EU:"

I also come from the UK and I agree with Conifer.

As I recall from a year ago, theissue was not so much that we now had to pay VAT, but more that the charge was added without any notice at all on 27 July 2007. Just my bad luck that my Tier payment day is the 27th of the month! However, Linden Lab later revised this and gave a month's notice, which was fair.

I have written to my MEP about this matter (no joy there!) and signed the Petition on the Downing St web site.

If anyone has any ideas about further joint action we could take, I should be glad to support it. We could try and lobby to get the law recinded when it comes up for review in the near future.

Thanks for setting up this joint discussion up Katt

I'm in the UK, so SL became 17.5% more expensive last year...

I have a few oints I would like answering please:

1) If LL are charging VAT (local tax) to EU residents, can we a) assume that we are also paying US local taxes also (we pay the same ex-vat rate at US residents) or b) LL are not paying US local taxes? We sould not be charged tax twice...

2) Where is LL classing as the "Place of supply" of the service? This is critical. LL's registered address is in the US, the server farms are in the US, we pay LL in US dollars, LL's Alternative Dispute Reslution is based in the US and the rems and conditions state we are subject to the local laws of there LL are based (hence the gambling ban). From this, we can deduce the "place of supply" of the service is in the US. In the UK, HMRC (Her Majesty's revenue and Customs) is quite clear on VAT regulations for the supply of services (ie the Second Life service) - http://www.hmrc.gov.uk/vat/int-serv-abroad.htm



There are however special agreements for Electronically supplied services:

These genrally refer to broadcast or games. Now, here is the interesting part - The SL Client is free of charge - LL do not charge to play the game. LL *do* charge for "premium membership" - this is not required to play the game though - the main benefits are better support (see Place of supply above - This service is based in the US, so therefore not chargable.) it also includes a "free" 512sqm tier allowance.

Also:

This means that email services, VOIP, Instant messengers and chat programs are exempt from the rules also - is SL just a big chat client?

Then onto tier fees - This is to purchase server space for the purchase of "virtual land" - land which can only be purchased (auctions excepted) in the "in-world fictional currency" of L$ andnot to actually download a service - so again "place of supply", could be argued, the US.

3) Why won't LL let us pay tier in L$'s? We are able to "cash out" L$ to $ to pay tier, so why not take it as L$'s? This would make a level playing field for all users - as the L$ is a "in-world fictional currency" This would be easy to achieve and would show that LL actually care about it's customers being stung with these charges.

4) If we are to be bound by the country we reside for the above - a) we should not be paying "double" tax b) we should not be subject to local (US) law such as the Gambling ban (again from teh HMRC website "For example, when considering the supply of gambling, if the supply in the traditional manner is exempt in a Member State, it would also be exempt if it constituted a supply of an electronically supplied service.
". We cant be governed by the laws of two separate countries - only by the one where the "place of supply" lies.

Thanks for listening, and I look forward to your answers.

Gomez

All this talk about what is fair, what isn't fair, it is all relative. Everyone can quote figures, statistics etc but it all comes down to the fact that there is no 'fair' comparison between countries, services, wages, cost of living etc. Everyone, yes everyone, has things in their countries that cost them, that unlevel the playing field, that make international business competetion a harder thing, they also have laws that are muddy, unclear, and often change to become even more confusing. Is it fair that people living in the EU have to pay VAT? That is not a question that anyone can really answer without having all the facts, and sadly, no one has all the facts, there are just too many variables. Like a previous poster remarked, that is just the way it is. If you don't like paying VAT, you can petition your government, you can move, you can leave SL. IMO, LL is just doing the best they can to comply with the law as they have been advised to.

And yes if you want to throw up figures on how it is unfair that people in the EU have to pay VAT and how it gives others like those in the US an unfair advantage, well then come to the US and work an average of 275.6 more hours a year than the average yearly work hours enjoyed in the EU (must be nice to have that extra free time) -

**Statistics on EU countries working hours were taken directly from Eurostat, and those for the USA were either included in the same survey or extracted from U.S. government Web sites for the 2006 year

Anyone can throw up figures in defense or in contention of just about anything - in the end you deal with things that are the way they are until they change!

No, it's tax avoidance - two very different things and perfectly legal to do...

Gomez

I think I can answer number 1.

US Sales Tax is not applicable and is not charged.