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

Yes VAT is levied at different rates.

And yes, you can take advantage of that - if you physically travel to another country. But for online and mail-order business the VAT in your country is applied.

To quote from the actual EU directive for non-EU business delivering online services to EU customers:

http://europa.eu/scadplus/leg/en/lvb/l31044.htm

VAT is only one of the potential taxations to creep into SL. But, lets not worry too much as this is all about to change.

OpenSim, and the recent 'experiment' to leap to and from a 'privately owned sim' (IBM in this instance), will soon mean the demise of the L$, except when you perhaps buy land or pay teir on LL owned sims. To make the ecomony reach all, the up and coming opensim platforms, the L$ will have to dissapear and make way for the VR Credit Card, or maybe Paypal style financing layers into the broadened economy.

LL cannot hang onto the role of economy God for all the various platforms linked to become the next internet webhosts. They will perhaps become the portal for many things, doubtful that will include VR World bankers and or sole custodians of all your IP rights. Once that become localised, then the taxation layers will kick in, all linked to your chosen way of paying your way through the VR maze.

Agreed AWM Mars. My biggest argument with HMRC about paying VAT in Second Life has been that Linden Lab are the only player in town, all roads lead to them. No European rival is disadvantaged because no European rival can sell me Second Life land without a link to Linden Lab.

When independent grids open, that whole argument goes out of the window and when independent grids want their own currency and these grids spread the tax authorities are going to change the way they look at virtual worlds, but this isn't going to happen in the immediate future, these developments are in early stages still.

This is a comment on the fact that there is no "United States Sales Tax" equivalent to the VAT.

There are individual states which are attempting to tax Internet purchases.

Wisconsin is one example of this . . . though paying this tax is currently entirely voluntary as a sort of confessional of the taxpayer since the state government of Wisconsin has no way of tracking or assessing what Wisconsin residents actually do on the Internet.

Link to 2007 Wisconsin Income Tax Instructions

Line Instructions on Page 24:
Line 34: Sales and Use Tax Due on Out-of-State Purchases

Did you make any taxable purchases from out-of-state firms in 2007 on which sales and use tax was not charged? If yes, you must report Wisconsin sales and use tax on these purchases on line 34 if they were stored, used, or consumed in Wisconsin. You must also report sales and use tax on taxable purchases from a retailer located in another country, regardless of whether you were charged any tax for that country or any duty by the U.S. Customs Service.

Taxable purchases include furniture, carpet, clothing, computers, books, CDs, DVDs, cassettes, video tapes, artwork, antiques, jewelry, coins purchased for more than face value, etc.

Example You purchased $300 of clothing through a catalog or over the Internet. No sales and use tax was charged. The clothing was delivered in a county with a 5% tax rate. You are liable for $15 Wisconsin tax ($300 x 5% = $15) on this purchase.

Complete the worksheet below to determine whether you are liable for Wisconsin sales and use tax.

-----------------------------------
Worksheet for Computing Wisconsin Sales and Use Tax

1. Total purchases subject to Wisconsin sales and use tax (i.e., purchases on which no
sales and use tax was charged by the seller) $__________

2. Sales and use tax rate (see rate chart below) . . x %___________

3. Amount of sales and use tax due for 2007 (line 1 multiplied by tax rate on line 2). Round this amount to the nearest dollar and fill in on line 34 of Form 1 . . . . . . . . . . . . . . . . .$_________

-----------------------------------
Sales and Use Tax Rate Chart

In all Wisconsin counties except those shown in a through d below, the tax rate was 5.5% for all of 2007.

a. If storage, use, or consumption in 2007 was in one of the following counties, the tax rate was 5.6%: Milwaukee, Ozaukee, Washington

b. If storage, use, or consumption in 2007 was in one of the following counties, the tax rate was 5.1%: Racine, Waukesha

c. If storage, use, or consumption in 2007 was in Rock County, the tax rate was 5% before April 1, 2007, and 5.5% on April 1, 2007, and after.

d. If storage, use, or consumption in 2007 was in one of the following counties, the tax rate was 5%: Calumet, Clark, Fond du Lac, Kewaunee, Manitowoc, Menominee, Outagamie, Sheboygan, Winnebago
-------------------------------------

Note the definition of taxable involves material "stored, used, or consumed" in Wisconsin. If you buy virtual clothing and wear it, where are you "using" it? You are using it in Wisconsin since you see it on your screen. The same is true of paying to listen to streamed music since you are consuming the music by listening to it.

It would appear all aspects of an SL account including paying for the use of land should be reported on the Wisconsin income tax form, since if you live in Wisconsin you are "using" that virtual land in when you login via the viewer from a computer based in Wisconsin, even if the actual virtual world is "stored" in California or a colo in Texas.

Though the likelihood any of this EVER getting noticed or payment being enforced at the bureaucratic state level is laughably unlikely.

.

The tax forms are simpler in Canada:


Step 1.) How much did you make last year? ___________

Step 2.) Send it in.

Ok so here is my alternitive point of view.

Vat is Vat - there is nothing we can do about it and as EU residents, we must pay it. However.....

Charging VAT on some parts of the service provided and not others, and not clearly defining who in receipt of that service creates an unlevel playing field which disadvantages all EU customers. Here is an example of what I mean:

I pay linden labs a monthly tier for 20 open space regions; I pay ((20 x 75) x 1.175%) = £1,762.50 (incl the 17.5% UK VAT). Do I use these services? No, I sell the land to other users and charge them Tier. So who is receiving the service? If its the person I sell the land to, am i not legally obliged (if a business) to charge them VAT if they reside in a EU country? Lets assume I am. But how do I determine if I should charge them VAT as I have no way of knowing their country of residence.

So, Point 1: If I am to be charged VAT and am operating as a business (or private individual that may exceed a tax threshold and be liable for VAT), then I must charge VAT to EU customers that I sell this service to. As I am in no position to determine the country of residence of the person I am selling to (as this information is not made available to me by SL), then is it not SL's reponsibility to apply those taxes at point of sale and present a price to the end user that reflects and includes VAT? This would mean creating a system that automaticaly adds VAT value to all transactions dependent on the users country of residence. But how would we do that with tier payments etc when these are often collected adhoc or through Paypal? Well you couldnt. Its not feasible. Therefore for the purposes of collecting the VAT, Linden Labs place the emphasis on the service being provided to me.

Where does that leave me though? Well, there is an argument that transacting in L$ is not liable for VAT and therefore I should not charge my customers it even if they are in the EU. However, once you get through the surface jargon of the EU directive, this is clearly not the case. I am obliged to charge VAT on anything which is bartered or negotiated where there is an exchange of goods or monies for services. It does not have to be money changing hands to be considered a VAT qualifying transaction. Given that the Lindex quotes what my Linden $ are worth in US$ and allows me to to exchange these in to real money, this further adds weights to the fact that I am selling something for which I am liable to pay VAT.

Point 2: If I am to be liable for and be charged VAT, as a business, I should be able to determine if I should also pass on the VAT charge to the person (end user of the service) that I am selling it to. SL makes no facility availble to me to accomplish this; therefore, each transaction I make, I am potentially acruing VAT liability of unknown proportions. What I mean here again is that, I can only write of (offset) business VAT if I am charging (and paying HMRC) on Sales that I make (else I am not operating a business!!!). If I declare sales and subsequently claim VAT back, then I must also show that I have charged VAT as appropriate to those customers that I have transacted with. How can I do this when I have no knowledge of the country of residence of the individual? Is it my responsibility to ask the user 'what country do you live in? the UK, ok then I must add 17.5% VAT to your tier.' - how would I verify this? I couldnt as the information is not made available to me but the operators of the service (LL).

So where am I going with this rant I here you ask!

Ok, so to get back to my first point, VAT is VAT; it has to be paid. However its my belief that linden labs as a service provider have a responsibility to either:

1) Better define who is in receipt of a service and make appropriate VAT charges to that person (which would mean seriously changing how transactions are conducted within SL) - for instance - If I am in the US and I pay linden labs for a sim and subsequently lease it to someone in the UK, then I should be charged VAT by Linden Labs and I should charge VAT to the person in the UK. This way, Linden labs collects the VAT from the correct person (the end user through the person that pays them for the land). The defintion of the end user should be the person who owns the land, or the person who owns the group that the land belongs to. This would only work if all secondary land purchases and tier payments were forced through a specific inworld payment mechanism.

2) Charge VAT payments directly to anyone from the EU who has land in their name, or the creator of a group that owns land. So if im from the UK and I lease a sim from someone in the US, i pay LL a VAT levy equivelent to 17.5% of my monthly tier. This would only work if all secondary land purchases and tier payments were forced through a specific inworld payment mechanism.

3) Make available appropriate information on each user to sellers so that it can be determined if the user should be charged VAT (i.e. so I can inform HMRC that I received a payment of 30,000L (equivelent to xx US$) for one months tier from a user within the EU and subsequently charged them VAT againt this value which I pass on to HMRC, and also claim back any VAT payments levied on me by SL). - This would likely contravene privacy policies defined by SL and require a change in these terms

4) absorb the EU VAT payments in their prices to EU customers so that a level playing field is created and the person being charged VAT can compete evenly with US users / businesses witout having the need to justify claiming back that VAT (i.e. I doesnt matter if I carry the VAT burden and I dont need to pass on VAT if I accept I am the end user of the service).

The grey areas and difficulty with this whole thing is about where LL defines the service is being delivered to. They are not taking in to account the onward provision and exhange of that service after it has left their hands. This creates a block in VAT accountability and liaility terms.

Apparently, I can buy a region from another user (in US$) through SL and not be liable for VAT on this (presumably because SL are acting as an intermediary and so are not liable for the VAT). But I can't buy a region from SL and subsequently sell / lease to another user without being liable for VAT (though I am acting as an intermediary). There should be a clearly defined policy on receipt of service and what is the end user of that service and this would clear the whole VAT issue up. Sure we would still need to pay it. But everyone who bought / leased land would pay it if they were in the EU. Not just if you bought / leased land from LL. I mean, its cheaper for me as a UK person to go and lease an island from a US user because they dont pay or pass on VAT. So why would I lease it from someone in the UK when I can get away with leasing it cheaper from someone in the US. The fact is that the person I am leasing it from is an intermediary - I am still being proided the service by SL and as such, as an EU resident receiving the service, should be the one liable for the VAT.

Anyway, my guess is that th is far too difficult for LL to implement. Based on that, the only fair option would be for LL to absorb the EU VAT rate and offer a standard price.

I'll get my coat.

HMRC have repeatedly informed me, via email and via letter, that transactions that take place entirely within a virtual world are not considered services for the purposes of VAT.

This means two things:

1. You have nothing to pass on as the VAT chain ends with you.
2. You have nothing to claim back, as the VAT chain ends with you.

It will be interesting therefore to see if any of the people who have entered a VAT registration number to avoid paying VAT on their tier fees are handed a bill by HMRC for their Second Life activities.

I take it that you're now talking about British VAT only. Swedish VAT may be applied differently, and in world as well:

http://www.virtual-economy.org/blog/sweden_moves_to_tax_in_game_tr

Slapitin Sideways, I understand your points, however, you are a reseller...

You buy services and resell them to other parties, and you must therefore charge and pay VAT. Anything 'imported' into the EU is VATable.

You mentioned about a VAT threshold, that only applies as to when you can register as a VAT company, which only allows you to reclaim VAT on the services you buy. The threshold for registration, last time I even looked was £49,000 PA turnover. Thats a lot of L$. Even in your presented calculation of your liability costs of £1,750 PM to LL, wouldn't alone take you into that bracket, unless you provide more than land for rent as a reseller.
Once you are able to register, then LL will provide you with the means to register your VAT number with their accounts, and you can get a VAT receipt of any transactions you do with LL.

The deal here with LL having to pay VAT, is simply because they have extended the data centre network into Europe.

My perception is, like all taxation applications introduced whether direct from a member state of the EU, or as a central directive of the EU, is always charge VAT if you are not sure about the situation. I am sure thats based upon the ambiguity of the VAT laws with the evolusion of internet services. They simply cannot decide a true and unambigious way of applying those directives, simply due to the dynamics.

Yes Chaz, HMRC only talk on a British perspective, they also say "currently" a lot, which means they can move the goalposts if they choose, like Sweden seem to be trying to.

Isn't there a 5,000 limit before the Swedish rules apply?

I'm not an expert in laws, and got tired reading previos posts. But I hav a question - I think that if LL would have daughter company in EU and EU clients would buy services from it then we wouldn't have to pay VAT - isn't that so? I guess making small daughter company with only sign and may be small room somwhere wouldn't be big problem.

B.R.

I think you have missed the point. Not everyone in SL pays the VAT, nor do LL pay VAT on all its services. They only pay VAT when those services/goods are provided to a member of the EU. At the moment, that VAT charge is leivied at 17.5% as those services are located in the UK.

No company can arbitrarily charge VAT to everyone in the world, so forming a 'Daughter' company, will acheive nothing, other than keeping the financial records seperated.

Nope, depending on the country the resident lives in, different VAT rates are applied, as example 19% for german residents

I just wanted to say, I love this post lol.

erm, no actually, now I have thought about this further, I can't see why I should pay VAT on set up costs!. If I phoned up a US company and asked them to go round and fix my sisters computer who lives in Chicago, I wouldnt pay VAT!!

There is no service being provided in to the EU on set up.

The EU see the place that an electronic service is being supplied in is where the person using that service resides.

This is all down to Freeserve spitting their dummy that AOL didn't have to charge VAT, this produced an unfair playing field for European companies.

However, the gravy train scumbags in Brussells know damn well that this ruling puts European users in Second Life at a massive disadvantage and they don't give two hoots because nobody here who is properly involved has the clout of Freeserve to make enough noise about it.

We're being ripped off by our elected officials and they are a greedy bunch of leeches who never tire of finding new ways to tax us.

You are effectively buying services from LL, who charge you VAT as you are in a EU state, they pay that to the VATman... If you are over the threshold to register as a VAT company, then you can claim back the VAT under expenses, less any services that you carryout to anyone, and apply VAT to.
As you have bought 'webspace/hosting/services' from LL and you pay them VAT, then you choose to resell those services to anyone, including non-EU members, unless you can gain definition of whether each client of yours is a EU member, then you must apply VAT to all of your customers, but not those that can provide you with their VAT registration and have VAT exemption. They must send you their VAT registration number in order to comply. It is not enough to say I don't know if they are EU members, when in doubt, charge VAT is their Motto.

However, this only really entitles them to receive a VAT invoice from you (assuming you are VAT registered yourself), from which they can claim back their own VAT.

The VAT offices stance is, unless you are VAT registered or not, if you cannot prove the origin of a client, then you must charge VAT and let them try and claim it back themselves through the VAT office. Either way, as a EU company, you must charge and pay VAT and either absorb it, or try and claim it back.

This whole mess will surely disadvantage any EU company delving into any VR platform that isn't EU specific, or 100% RL business orientated, when trying to create International commerce with Avatars of 'no specific origin'.

You can't charge VAT for services or supplies that are exempt from VAT. HMRC see inworld services as exempt from VAT at this moment in time.

If all your services and supplies are VAT exempt then you can't claim back any VAT paid.

Europeans might want to start considering using paypal more often.

Yep, but a set up is not a service being delivered to me - Its LL setting up a server (i.e. configuring so a service can be delivered). The monthly tier is (arguably, even though I would dispute its being delivered to the person whose name i on the land)

If they see inworld services as exempt from VAT, why are LL charging me VAT? I guess because im made to transfer my lindens to dollar currency and then pay the tier. Which denotes that if my customers paid dollar (i.e. paypal) then there is a VAT claim to be had?

Really daft isnt it. Why don't LL just let us transact Land in Lindens. Grrr - I wouldnt even mind paying an eqv Lindex exchange surplus. Seems simple enough.

VAT rates?

They vary by country in Europe

What is each region paying, or are we paying the highest and Linden pockets the excess as charges?

Since the month of may (no joke) i'm trying to be able to to hv my alt VAT registered.
Main ava no prob, but after about several live chats (let's say 2 times a montht) my prob still nothing is solved. Living in Europe it can't be that difficult i think with LL having an office in UK. Mine sure does. Does anybody has the same probs, pls contact me inworld
crystam flyer

VAT is a sales tax levied by the European Union on goods and services passing through the value chain to the final consumer. To the best of my knowledge, Linden Lab is subject to VAT solely because it has an office in Brighton, England and thus a legal presence in the EU.

Presuming LL cannot now extricate itself from the EU Tar Baby - even by closing the Brighton office - how should the VAT problem be resolved? Here is what Zee Linden has to say: "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." Yet I could draw the opposite conclusion: that because of its enormous success in the European market, Linden Lab can easily afford to absorb VAT - and do so without detriment to non-EU residents.

COGS (Cost of Goods Sold) is a cost that varies with sales. The simplest way to think of it is the cost of hiring more salesmen or designers when your business grows. Alternatively, think of the cost of electricity for a restaurant. The more customers you have, the more food you cook, the more electricity you use, the higher your electricity bill. Needless to say, it would be foolish to turn away customers in order to save on electricity. You need to measure costs against revenues.

Gross Margin = Gross Revenue - COGS.

By absorbing VAT, Linden Lab would face an increase in COGS. In addition, Linden Lab would face a surcharge on existing European revenues. At the same time, passing VAT onto European entrepreneurs reduces Gross Revenue because 1) existing European entrepreneurs withdraw their financial and human capital, 2) potential European entrepreneurs decide against investing and 3) the reduction of European participation undermines the Network Effect (a term used by economists to describe increasing marginal returns). In other words, passing VAT onto European residents is not free. While absorbing VAT reduces Gross Margin, passing it on reduces Gross Revenue. I maintain that absorbing VAT is the lesser cost - especially in the long term. I believe that Linden Lab is turning away customers to save on electricity.

There is more to it than money. The once-harmonious relationship between Americans and Europeans has come under increasing stress because of discriminatory pricing. The issue ran like an open sore for months as European entrepreneurs bled out of the game - never to return because of the recent rise of the dollar against European currencies. If SL is to be an American game, no problem, but unless LL reverses its policy of discriminatory pricing, it’s nonsense to pretend Second Life will become a ‘global village’ in the face of massive regional disincentives. A restaurant that turns away customers to save electricity is bad enough, but one that does so by setting higher menu prices for foreigners is unlikely to remain convivial.

You must have missed the initial memo. It is countries in the EU who made it a legal requirement, for those not willing to do jail time, to charge VAT. It was not a whim of Linden Labs. But that VAT is invested in essential social services in the EU. Surely you don't object to paying your fair share of social services for all?