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

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.

The main reason LL's VAT policy was so badly received by european residents is that it showed a complete misunderstanding of european culture, pricing policies, and customer expectations outside of the US.

LL is not the only US company that has to charge VAT in european countries. Blizzard does it, Amazon does it, eBay does it, iTunes does it. And nobody complains about these companies, why ?

Because instead of blindly applying VAT rates on US$ prices, they have localized their product prices. When you buy in the US, folks pay a rounded off price in US$, like USD249.00 and not USD236.87. You decided to absorb any variations in your costs (electricity bills, wages...) by setting that round price at a healthy margin above your costs while staying at a reasonable level within what people are willing to pay. That is how pricing works, right ?

When you sell in the UK, you need to set a rounded off price in UKP including VAT. When you sell in France or Germany, you set a rounded off price in EUR, and so on... These prices are individually set using the same criteria as for the US prices but based on local revenue and cost of living, and taxes.

Culturally, in europe, all web sites are translated and all prices are displayed in local currency including VAT. Most of the time the "incl. VAT" note isn't even visible. Most companies round off the retail prices (for example 9.90€ all over europe and £14.99 in the UK) regardless of the various VAT rates and exchange rates. This means that VAT and exchange rates are transparent to the end customer. It's the vendor's job to deal with VAT when they set the prices.

European customers don't expect to see it as something that's added to the retail price. In that respect it is not like US sales tax and shouldn't be handled as such, because that is not what your EU customers expect.

For example, a song on iTunes costs (inclusive of VAT when applicable):
EUR 0.99
UKP 0.79
USD 0.99

A monthly subscription to WoW is:
EUR 13.99
UKP 8.95
USD 14.99

The same applies to Japan, Canada, Brazil, Mexico and so on...

So basically, a much more clever way of handling the issue of VAT would have been to do what all other companies have been doing for years:
- Translate your website (get a specialized company to do it, like others do)
- Provide international support lines (just like every other company does)
- Set up an international price list with rounded retail prices (including local taxes) in all currencies and ignoring the actual exchange rates.
- Bill in local currency (you have an office in the EU, it can't be that hard)
- Refund VAT to registered companies based on their local rates (this is how it usually works here)

The final note here, is that LL is free to set the *final retail price* per country to whatever you want. It provides you with more flexibility in managing different markets. You are free to absorb the variation in EU tax rates. You are also free to *partially* absorb the VAT altogether. It is not unfair, it's widespread standard practice in the industry, and it's the price to pay to have an international market with satisfied customers instead of frustrated ones.

If that would work we would do it. But unfortunately it wouldn't work.

Zee, i never like to change with you. Its a mess with this vat and your job is more complicate with all this behaviours around it. My best support for the clearance of that case with the hope this mess will end soon.

upposing mode on:
I have always Microsoft as a large software and internet-games company in mind to compare a bit between LL and MS. What did they do in such a case. Are they paying also VAT to the EU or have they a special agreement with those? Would be interesting to know more about that because we can take the best opportunities and experiences from them for this "VAT case".
upposing mode off:

Thanks Kittrannia for being a happy parcel owner! I'm sorry that the price of a full region is too high for you. We recently launched the discounted Open Space product for "light use" regions where a full sized low prim region is sufficient at 1/4 of the price. That has been a low enough price for many residents and the product has been extremely popular.

<snip>

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%.

While no doubt enlightening in a real world sort of way, this whole VAT discussion is moot. The taxman charges and those who are taxed, pay. Tax rates are different the world over -- if not on one thing then on another. The question you have to ask yourself is simply, "Is how much I'm paying worth it to me?"

Linden Lab is merely passing along a cost to those who have incurred it. What could be more equitable?

Not fair because of this, that, or the other thing? That's really a matter to take up with your taxman, not Linden Lab.

This is your reply to a post suggesting that you move your EU offices back to the U.S., so that you don't have to collect VAT from EU people.

You are wrong, Zee. No overseas company is required to collect VAT from EU residents. The EU cannot make rules and laws for companies in other countries. The reason that you have to collect VAT is because you have offices in the EU. I'm sorry, but your reply was wrong.

It is my opinion that the reason you don't move back to the U.S. is simply because you don't want to, and you don't care that it affects so many of your customers. Replies, like the one I quoted, won't wash, because it simply isn't true.

NO. Again and again, it must be made clear that while the EU is imposing VAT on Linden Lab, Linden Lab has a CHOICE whether to treat VAT as a global 'cost of goods sold' or a regional 'tax' to be passed on to a subset of its customers. That choice will depend on the effect of VAT on Linden Lab's (global) gross margin compared to the costs associated with sacrificing its European market.

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.

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.

It is not harmonious when Europeans are asking the rest of the world to pay their taxes for them. That's the bottom line, because it is not a cost that LL wants to or should absorb as the "cost of doing business." Zee already said that LL is marginally profitable. You folks want to erase that margin, or force LL to raise prices on tier.

But it is perfectly fair for the Europeans to pay fees which include all the American taxes that a successful worldwide company based in the US has to pay!!

Of course it is a cost of doing business, it applies to all companies collecting monies for supplying and electronic service to Europe.

I wonder why the US residents prefer things to stay as they are where they can make profits that are denied to Europeans.

And I am not taking a selfish approach - I don't pay any tier fees nor make any profits. I just enjoy SL for all the other things it offers, but that doesn't stop me feeling aggrieved that one group of people is being treated unfairly.

A bit like the US government expecting the UK to extradite its citizens without trial but refusing to do it the other way round. Oh of course - the UK government agreed to that _ I guess this one sided attitude isn't so surprising, but it does erode good relationships.

May I point out that the effect is the opposite way round to what you imply. This actually means that I get less profit because of the stronger pound. I want the Dollar to go up against the £STL, so I get more pounds for my buck.

The weak US$ has hit my profits (down 12%) and the imposition of VAT has hit my costs (up 17.5%). It's a double whammy!

How many times do you have to be told that you are not paying any sales tax imposed by any state?

You don't pay anything beyond the normal cost of doing business, which is the expected margin over LL's income tax, property tax, etc. which is NORMAL. LL doesn't profit off of VAT, the EU does.

What percentage of SL residents do you think pay their tier from in-world businesses? What percentage just pays using RL currency? The weak dollar definitely helps those folks.

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.

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.

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.

I suspect what we're looking for here is a solution, not just restatements of the problem.

So, to be clear, you *are* claiming that Linden Lab are making a 17.5% to 33% net margin on private islands?

But it is perfectly fair for the Europeans to pay fees which include all the American taxes that a successful worldwide company based in the US has to pay!!

Of course it is a cost of doing business, it applies to all companies collecting monies for supplying and electronic service to Europe.

I wonder why the US residents prefer things to stay as they are where they can make profits that are denied to Europeans.

And I am not taking a selfish approach - I don't pay any tier fees nor make any profits. I just enjoy SL for all the other things it offers, but that doesn't stop me feeling aggrieved that one group of people is being treated unfairly.

A bit like the US government expecting the UK to extradite its citizens without trial but refusing to do it the other way round. Oh of course - the UK government agreed to that _ I guess this one sided attitude isn't so surprising, but it does erode good relationships.