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

It's not that simple. VAT is not something they have to absorb. Nor should they! It is the EU screwing you, not LL.

If SL is to be an American game, no problem, but unless LL reverses its policy on VAT, it’s pure nonsense to pretend SL will become global in the face of massive regional disincentives.

You can see VAT as the cost of doing business with international customers. All LL's customers currently pay LL's California taxes and electricity bills, whether or not they live in California and benefit from California schools or hospitals.

International customers cost more, because you have translation costs and localized customer support. Are you going to charge your japanese customers more than your french customers because it costs more to translate the website in japanese than in french ?

So, let's say that EU customers cost more. This cost also allows LL to boost it's user base (and revenue) by 33%. It also brings great diversity to SL, and don't forget, if you are doing any kind of business in SL, 33% of your revenue is likely to be from europeans.

LL's costs fluctuate every month with wages, local taxes, power bills, rent, and so on, yet the region fee stays at a neat round $295. In the marketing world, a price is never set simply on the basis of cost+margin. The main factor in the art of setting a public retail price is "what is the customer ready willing to pay".

Also, LL does not have to totally absorb this extra cost. They could set local prices that absorb maybe half of the VAT cost. Read my post above about how prices are usually handled in europe and what european customer expectations are.

Now, if we could avoid the slight euro-bashing and concentrate on positive ways of handling VAT, it would be more pleasant for everyone.

Linden Lab has a choice. They determine corporate strategy. Either they pass VAT on and destroy their European customer base or they absorb VAT because it is profitable to do so (by retaining/expanding their European customer base).

The question is whether Linden Lab has been so badly damaged by VAT that they feel they must sacrifice their European customers for the sake of corporate survival.

No, they wouldn't. They would set the price for Europeans owning islands to US$238.95. However, the European would pay this price, _plus their own VAT_, bringing them to a total of US$295, the same as an American would pay. No US users' money is being used to pay the European's VAT.

Ah, but LL need that money for themselves. Certainly that's possibly true. However, let's consider:

Private Islands run on exactly the same hardware as mainland sims, yet cost US$100/month more; and the cost of computer hardware tends to go down, not up.

It's thus Linden Labs are currently making a fair profit on the monthly tier fee, especially for islands. If European users are refusing to buy islands because of VAT, then absorbing VAT on their tier could actually _increase_ profits for LL (because they sell islands that otherwise they would not have done, and make at least _some_ profit on those sales - less than they would have made if the European users had bought them in spite of VAT, but that world isn't real). The only problem is that,based on the comments on this thread, politically it would be a disaster because of the likely reactions of US users.

You just don't get it. Either the European customers pay the tax that their countries are demanding or everyone pays the taxes for the European customers no matter where they live. LL can't magically create Euros, and I assume that the EU won't take $L. All of LL's money comes from the customers. VAT taxes can be paid by the customers that the taxes are applied to, or LL will make everyone pay for them through higher fees.

Tier fees are about the server upkeep and all the other costs of running SL, not the initial hardware price. Mainland sims are only $100 less per month than private sims if one person owns the whole thing. On average, I'd guess that mainland sims bring in more money to LL per sim than private sims.

Either Linden Lab passes VAT on and destroys their European customer base (with a concomitant loss of global revenues) or they absorb VAT *BECAUSE IT IS PROFITABLE TO DO SO* (by retaining/expanding their European customer base).

Let us not forget the 'network effect' with potential increasing returns to scale. Destroying the European customer base (in particular by alienating talented investors) undermines the network effect for Second Life.

Lots of good fast replies, Zee - many thanks.

Your list of EU countries and rates doesn't include the Guernsey anomaly so I still have no idea how you treat it.

If it is not too much trouble, could you just pass on to your billing people that when they see what appears to be a UK postcode beginning with GY, perhaps even with UK on the end of the address, it refers to a strange little island called Guernsey which is the personal possession of Her Majesty the Queen, has a population of 60,000, is not part of the UK or a member of the EU, and pays no VAT.

It pays no taxes to the UK or Her Majesty either, having been granted this benefit in perpetuity as a reward for exceptional loyalty to the crown centuries ago. We have our own parliament, and levy our own taxes on our own people. Even our laws are written in a bizarre and unique variation of mediaeval french.

Vive the independence !!

Occupied by germany in WW2 we were, though - not much fun, I am told.

They probably do. However, VAT is less of a problem for consumers who are buying the land for themselves, because for those people, the benefits of the exchange rates, etc. come into play. The people who are hurt most by VAT are European want-to-be land barons who can't compete, and they're likely to prefer islands.

The payment of tier in L$ need not affect the money supply at all, therefore having no inflationary or deflationary effect.

If LL immediately sells these L$ on the Lindex it gets its real US dollars, and pops the L$ straight back into circulation, keeping everything the same.

Except maybe charging europeans VAT on just the transaction fees.

Currently (I believe) tier comes from any US$ balance first, then from your credit card. Just allow an extra option, to grab from any L$ balance first.

Doesn't this just about solve the entire "VAT on tier" problem ? Any European who wants to avoid (not evade) unnecessary VAT costs just makes sure he has enough L$ each month.


Come on Zee - do it !! Where's the downside ?

There is no such thing as "absorbing VAT". Either the customers in the EU pay for it or everyone pays for it. Those are the only 2 options. There is no way for LL to pay for it unless they take the money from customers.

I used to live on the Washington / Canadian border. On any given weekend the mall parking lots were probably 70% or more Canadian plates. Why? Because Canada has a GST and the US only charged the local sales tax. So they would load up and then beat a hasty retreat back across the border. Instead of changing the law, they tried to circumvent it. They would sure scream though, if they got stopped and questioned about their purchases on the way home, and had to pay the tax.

My point? Just that taxes are a way of life. In the U.S., some states have an income tax, some do not. Some have higher sales taxes, and in fact, that can even vary according to city. In California, there is no sales tax on "services" and since the land etc in SL is considered a service, it is not taxed. However, if that changes, or the California government decides the things sold in SL should be treated as real, then anyone residing in California would pay sales tax on their SL holdings. Should LL refund that so they can play? No.

Is it fair that EU residents have to pay more for SL than those who live where there is no VAT? No. But at the same time, why should LL have to either absorb the tax YOUR country charges you, or sell their services to you for a reduced rate because YOUR country charges you an added tax? They shouldn’t, plain and simple.

I see people asking about what LL is doing to change the attitudes of these countries that charge VAT? What is LL doing?? What are YOU doing? It is your country doing this to YOU, not me, not the U.S., not LL. It is YOUR tax, YOUR issue, YOUR problem to solve.

I find it funny that many people who complain about LL abiding by the EU VAT directives and not U.S. law, are the same ones that, when it suits them (can anyone say gambling??) want LL to use EU law and not the U.S. law. Can't have it both ways folks.

Bottom line to me is, some countries charge taxes on electronics services whether delivered from inside or outside the country, to the residents of that country. It does place an additional burden on any attempt to own sims or do business in SL. But it is not an SL / LL issue. If you don't like it, change your laws. To ask LL to level the field for you is naïve and unfair in the asking.

Just to clarify - they take the money _from the European customers_. The European still pays all their VAT.

Yes, as a result, LL make slightly less profit from them. But they still make _some_ profit (ie, they don't lose any money), which is more than they would have made if the European user just hadn't bought the land at all.

There is no question of LL taking a loss on European customers which would then have to be paid back by US customers. I don't think it would be in LL's interests to do that.

Also, all the comments about "put up with it - don't ask LL to do anything" - I think it should be plain that the reason we're having this discussion is that the VAT policy has bitten LL, in particular for the effect it's had on island sales and the land market. In other words, European users _did_ put up with it - by not buying land - and LL don't like that. I suspect what we're looking for here is a solution, not just restatements of the problem.

It boils down to simple global business: You choose where you want to set your business, along with the local tax consequences, and you choose which markets you want to compete in, along with those tax consequences.

The type of business Linden Lab is into yelds different returns in different markets. But so do the competitors in that market. They all pay VAT in Europe and they all enjoy the lack of sales tax in the US market. Margins maybe be less in the UK market than it is in the Canadian market, but it is a corporate choice to participate in those markets or not.

Because it customers are transacting with each other, LL cannot afford to let customers from one market gain a significant financial advantage over customers from another market for any lenght of time. Aside from the potential decline of adversly affected markets and because people in SL tend to be of the creative type, there would be shifts and changes in the economic models as Europeans get smart to get around their VAT disadvantage. It could create vast classes of residents who conduct transactions and manage assets differently from other classes and thus, in effect, lead to segregated economies within SL.

LL needs to price locally to keep SL a global economy.

So, I as a U.S. customer, should subsidize those in markets that charge a VAT? I don’t think so…

Right now I might love to have a private island in SL. But I don’t. Why? Because the economy here has negatively affected my RL business, and my SL business, in a way that makes owning a private island outside the scope of what I can afford. So LL should make those that can afford 10 or 20 islands pay more and give me a reduced rate so I can afford an island.

That is what is really being said here. The argument that you can not be competitive in business in SL and still pay VAT simply is not true. It may mean that your profit margin is lower, but that is just part of business. If my buddy can buy TV’s from China by the container, and I can not afford to purchase in that quantity, I pay a higher price than he does. To stay competitive, I need to match his price and make less, or find a way to add value to my business so people do not mind paying a slightly higher price. Thats just business….

The whole concept that because of the economics some people live under, the rest of us should pay more, or LL should make less, so they can own a sim or do business in SL simply does not wash.

Can you imagine the chaos that would result if LL started pricing based on location? Lets say they lower the tier for EU residents. I can imagine several ways I could register as an EU player yet beat the EU out of the VAT in the end. Or lets say they lower it for EU and then EU changes its policy. What happens to the pricing then.

I am not trying to just re-state the problem. The solution to me is clear. Those that live in countries that charge a VAT, pay the VAT or get the law changed. It is not my desire to pay so they can play, and I don’t think LL should either.

I do not believe this thread was started because LL is hurting over potentially lost business due to VAT. I believe it was started because they believe, probably mistakenly, that if it gets discussed properly in this forum, the issue will quiet down.

Offsetting pricing for those whose countries charge them a tax smacks of socializm to me. And I really would consider the potenial backlash if such a plan was put into action. I don't think it would be a wise move either politically or economically.

DRD

That doesn't help inworld business at all, that pay their fees to LL from L$ they make inworld. At the end of the day, they still have to sell 15-25% more L$ to cover their expenses than non-EU businesses - and therefore have to charge their customers those 15-25% more. That's more or less impossible, because I doubt that many customers are ready to pay that out of sympathy for the EU based businesses.

What I think would be of great benefit is Linden Lab telling us what is best. We give them enough money each month, So why dont they hire some people that are experts and then assure us that within the law and to no great cost to LL we are paying as little as possible. That would make more sense than bizarre theories, half truths and the little bit of good solid information that gets caught up in rambling anecdotes about tax.

Do I want a discussion on this or do I want an expert assure me I'm getting the most bang for my buck?

Get a clue. Seriously.

So all LL has to do is charge Europeans less for islands and less tier than it charges everybody else, the Europeans will pay their own VAT, and everything works out fine? I rarely laugh out loud on the forums, but that one got me. Somehow this magically makes everyone pay the same amount, and the non-Europeans are not subsidizing the rest? Just because our tier does not increase? We magically overlook the fact that you're paying $240 to LL and we're paying $295? So what happens when LL has to raise us to $315 and you to $260 to maintain profitability? That still sounding fair to you?

Your national tax situation is your business, literally. I'm sorry that in this situation it is cheaper to be in America. Our gas is still much cheaper, too. I'm not going to pay more for gas to make that fairer, either. Is it fair here in the U.S. that my house on Kauai is worth more than a comparable house in Kansas? Should I not have to pay so much in property tax because it's more expensive here?

Thank you, Zee, for joining us, and especially for pointing out that the collapse of the U.S. dollar has already increased costs for us by 12%.

No, you didn't get that correctly. EU customers would still pay the same $ 295 you pay, but LL would take the VAT out of these 295 and send it to the EU tax autorities. (Interestingly, under EU tax laws price have to be published VAT inclusive, so your normal EU customer expects that the $ 295 are VAT included and doesn't expect that VAT will be put on top of that.)

How do you come to that conclusion? We all pay tier in dollars. Inworld business sell Linden dollars to pay fees. The weak US dollar increases the consumer value for a European consumer, it does not help a European business however, they now get less Euros out for the same amount of US dollars, whereas a US business gets the same amount of US dollars out.

I believe transactions between individuals are VAT free.
So if Lindenlab was to appoint a individual outside the company to handle the european payments (a strawman?) everybody would be happy.

Not really thought through as to all the legal loopholes though.

I would then be paying part of your taxes out of my $295, or LL would keep all of my $295, but only $240 of yours, sending the rest in VAT to the EU? So I imagine a day when we would all be paying $315 to keep LL profitable, which still results in my subsidizing your taxes. Pass.

Um, because you can now change your Euros or Pounds or anything into more dollars with which to pay your tier? Like that. I'm not picturing SL as some sealed biosphere in which you can only pay your tier through in-world earnings, since that is plainly not the case.

You're only seeing the consumer angle, you're not seeing the business angle.

Consumer - weak dollar is good for European consumers.
Makes no difference to US consumers.

Business - weak dollar means less revenue for European business who cash out.
Makes no difference to US business who cash out.