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

Interesting this as it's hard to know how they work out net costs but island prices did drop by USD$675, now that suggests they were making a healthy profit on them at the old rate.

I'm pretty sure I read somewhere that an island costs around USD$400 - 500 to setup but I don't know if there are extra costs that would cut into the net profit.

Granted Rusalka, but the _big_ hit is on Linden Lab, because it is the business owners who have the premium accounts, and pay the most tier. They also conduct the most Lindex transactions. If they cease and downgrade to basic , or even just down tier, then Linden Lab's revenue decreases. Linden Lab's major revenue streams will certainly be tier and the charges for Lindex transactions.

If VAT costs prevent my business from expanding, then Linden Lab's business is hit by that small amount. Multiply this up and the hit on Linden Lab becomes significant.

We succeed or fail together - it's as simple as that.

Having said all that - I'm not moaning about paying my taxes, or blaming Linden Lab - just pointing out that the nature of the situation is one of mutual concern.

If the situation was reversed and US based residents were having their businesses squeezed from both ends, I wager we would hear more moans and groans than are coming from this side of the Atlantic.

Im in the Uk..........I just simply do not understand why i have to pay VAT...VALUE ADDED TAX......on a foreign sales transaction. If anything, I am importing even if it is only data......therefore i could understand if i had to stump up 9% import duty, but 17.5% is nothing more than a rip off.

If i ordered a pair of Jeans, mail order from the USA, then i would expect to pay the local sales tax, and maybe some kind of import or customs duty. But VAT at UK rates..nope, it sounds ludicrous, it is ludicrous, and is nothing short of highway robbery. GRRRRRRRRRRRRR

As it happens, up until emigrating three years ago, I've lived my entire life in Europe, so believe me, I have a pretty good idea of what matters are like thereabouts.

I've also, therefrom, had a bellyful of people explaining to me precisely why it would be to my benefit to pay more or not do this or be required to do that, or whatever, in the interests of 'fairness', or 'balance', or some other egalitarian weasel-word.



Then perhaps they should stop suggesting solutions that are either that, directly, or which boil down to that after fairly trivial examination.



This is true. There just happen to be a lot of them around.

Well VAT is the reason I haven't gone into the Openspace business.

I heart you Athanasius

Well, first, you won't pay any local sales tax. It's out-of-state commerce, so sales tax doesn't apply.

If you order goods from the US (which would have been VATable if sold in the UK) and the Customs & Excise - well, HMRC, now, I guess - catch you at it, your goods used to be held at the post office until you go along there and stump up the 17.5%.

Been there and done that.

(You're right about the highway robbery, though.)

Ahhh, you do get it. This is entirely the point. Buy European! Except, it doesn't quite work with SL as the only virtual world with this kind of micro-economy. A European version of SL is the one that would benefit from the ultimate ramifications of VAT.

Yes - it stoped me from purchasing a sim, too.

NO. Europeans are NOT asking the rest of the world to pay their taxes for them. The issue is whether it is profitable for Linden Lab to absorb VAT.

COGS = 'Cost Of Goods Sold' = 'cost of sales'.
Gross Margin = Gross Revenue - COGS.

Passing VAT onto European entrepreneurs REDUCES Gross Revenue because 1) existing European customers sell their assets and withdraw their capital from the game, 2) potential European entrepreneurs decide against bringing capital into the game and 3) the reduction of existing/potential European investment undermines the 'Network Effect' (increasing returns to scale) that Linden Lab desperately needs to remain viable in the future.

Absorbing VAT INCREASES COGS, but it increases a cost associated with SALES.

The question is whether passing VAT onto European customers REDUCES Gross Revenues more than it INCREASES COGS. That's what I mean by looking at the situation in terms of global Gross Margin.

I maintain that the cost to Linden Lab of sacrificing its European market is greater than the cost of absorbing VAT - especially in the long term.

Well only Zee would be able to answer this and the thinking back in September was that absorbing the costs was too great.

Eve online hasn't raised costs for American players in light of the weak dollar though, probably to do with your thinking on assessing whether taking a hit on income from Americans is less likely to lead to reduced profit than increasing fees for Americans.

So, Zee. To be clear, you are saying that SL initially provided a global service with one unified price structure, even though that meant LL willingly absorbed the impact of VAT for EU residents.

Then you decided to stop doing this and not absorb it any longer?

I pay VAT and am happy to do so - as long as it is a legal requirement. I also do not think it fair to expect others to subsidize me. I expect most tax authorities (including US States) will latch on to the opportunity eventually anyway.

However, one area I find difficult is the disinterested manner in which LL dismiss 2 key questions affecting non US Residents:

1. Does SL actually fit the "electronic service" description being used to levy VAT? I think it is far from clear that applying it in this instance is legally robust - your tax advisors seem to be adopting the path of least resistance rather than offering comprehensive advice.

2. If paying tier inworld in the form of Lindens is a legal and defensible form of VAT avoidance, why arent you being more proactive in pursuing and advising on such options? Having read this thread, it seems to be left to non US residents advising YOU?

(Finally, could i implore all Residents to STOP with the territorial bickering? Pointing fingers and making references to "moving to another country" or "take it up with your politicians" or "we want subsidized" are soooo unhelpful. Arent we all Residents together in SL first and foremost?)

"Appease you people"?

oh dear.......not sensing love for non American Residents in your post Cristalle. But don't worry, we still love you. - hugz. xx

I wonder if Zee could give us any indication of what has been happening over the last year with the number of European accounts and the revenue generated by them?

If I were to see a situaton where the number of accounts from European countries were increasing, but the amount of revenue generated from them was decreasing, I should be feeling very worried about the business.

I think that with this question, you showed the most important thing to look at concerning the whole VAT thing...
When the VAT was announced to us (you all know in what disastrous conditions), I called a friend that works for Sweden at the EU and asked her about SL and the VAT. She answered "what's SL exactly?". They never heard of it!
The fact is that it's a little strange. If I go to USA, buy and ice cream and enjoy it there (don't bring it with me to Sweden!), should I pay the swedish VAT(25%)?
SL is a game that we play physically IN USA. we don't import it to EU.
The servers ARE in USA. The things we build stay in the US servers...
Thanks Jo! This was a hell of a good question!

Which was answered on the 1st post of this thread with the following EU directive:
http://europa.eu/scadplus/leg/en/lvb/l31044.htm

This is a special case for electronic services, which goes against the general principles of EU VAT policies. You are enjoying your electronic service ice cream in your country of residence, so the vendor is supposed to charge prices including VAT of your country.

Again, LL shouldn't be reinventing the wheel here. Setting an international pricing policy is not cutting edge tech. Companies from all over the world have been practicing localized pricelists for decades.

When you buy a Chevrolet or a pair of Nike sneakers in the US, or Japan, or Brazil, or Spain, they don't just set a base price in US$ and slap local taxes on as an afterthought. They simply set a different price for each local market based on the specificities of that market (including competition, cost of living and taxes).

Of course, profit margins vary for each local market, but that's the cost of doing business on that local market, and it's better than not addressing that market at all, isn't it ? Either you embrace those different margins or you quit that market to concentrate on the more profitable ones.

LL has chosen to address a worldwide market, therefore it has obligations such as translating its website, accepting local currency, offering international support, and charging localized prices inclusive of local taxes. Just like the hundreds of companies that do the same thing.

There's nothing special about SL in this respect. It's an online service like many many others.

This whole VAT issue is international marketing 101: local pricing is an ordinary everyday business exercice that many companies in the world handle routinely without half as much drama and frustration.

New Private Islands and Mainland Sims run on exactly the same computer hardware, yet the tier for an island is US$295, and the tier for a mainland sim is US$195.

This pretty much seems to me that either a) LL are making a loss on every mainland sim with a single owner (possible, but unlikely), or b) US$195 covers all the running costs and that extra US$100 is pure profit.

Moreover, when the US$100 increase was announced a few Novembers back, I seem to recall LL were actually fairly plain that it was a social engineering tax intended to discourage SL from becoming fragmented.

/me did not read it that way. In particular, Zee commented...


http://blog.secondlife.com/2006/10/29/price-for-new-private-islands-to-increase/#comment-12405

There may have been other comments that said it was a more social action but these were the good (sic) old days before the 150 comment limit - I have not read all 542 comments on that blog post, or any of the ones on the blog posts that followed it.

Right but that stll points to a 50% markup which is pretty consistent throughout. Hardware for islands costs less than USD$400.

Not only that-you'd also pay the appropriate customs fees, if the value is above, I think, €30. Been there, done that, got the t-shirt...

Sindy, I'm sorry, I think you're right - however it does confirm my point: Zee mentions that "our price (US$195) before that was basically at our operating cost" - in other words, it does cover the operating cost, without needing to be claimed back from somewhere els.

Yes, the extra US$100 could go towards funding future development - but that's a general "pot" of money for everyone on SL (in other words, one sim does not require a particular amount of "future development" just to keep going).

And thus, it is true that regionally pricing islands at US$295 _inc_ VAT for Europeans could be in LL's interest, if those Europeans would not have bought the islands otherwise (which, I admit, has yet to be proven - and the point that the Europeans who're renting from US users right now, would stop, is a very good one)

Or possibly the number of mainland sims with multiple owners provide the difference overall - so overall the tier revenue averages out about the same for mainland as for islands.

There are four times as many private islands as there are mainland sims. Educational sims get a discount, so everyone is subsidising them, funny how I don't see complaints about that.

/me has no idea what hardware, or the colo space to host them, costs but < US$400 sounds a little low for a dual, twin-core server.

I wouldn't object to LL going back to eating VAT, if they also gave people in the US a break for the US$ sucking so badly and dropping 20% vs the Euro over the last couple years. Even Canadians laugh at our money now.

(/me has a bunch of friends in Canadia.. Just joking, eh!)