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

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.

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:

1. Currently approximately $600k per quarter
2. I'm not sure, but Europe represents approximately 1/3rd of all of our resident activity
3. More than several hundred, beyond that I do not know off the top of my head.

Hope that helps.

Here now, sorry for the delay. Trying to answer as fast as my little fingers will type.

Well said and agreeable. Zee has stated their position about VAT paying and L$.

According to the directive we are required to take reasonable precautions to ensure that the people we are billing are from the country they say they are from. We check billing address and bin numbers on credit cards and also the IP address used at the time of purchase. We do not look at the IP address of the users on the land. Someone outside the EU could certainly be servicing a population of people inside the EU and that would not affect the billing address of the individual providing the service. If someone did this as a business however, they might be required to collect VAT - I'm not sure. I'm only sure that we are required to collect it.

Zee, the position in the Uk is clear, I have letters galore about it. Transactions that take place entirely within a virtual world are not considered as supplies or services for VAT purposes. I can scan umpteen letters from HMRC, government ministers yadda yadda yadda.

What are the implications for the economy as a whole if you do this? Will we see inflation issues? Will the Linden dollar be devalued?

So many posts in such rapid succession just indicates that I type quickly. Caffeine could be an issue too.

With regard to hard fast rules, yes, they exist. We solicited very expensive tax advice from a couple of the "Big 4" global accounting firms and we got consistent advice. I don't think anyone should take tax advice from anyone posting into a forum.

Believe me, I didn't want to charge and remit VAT either, but we are required to do it and we did it in the best way we could and we tried to be as fair as we could. I'm sorry if that disappoints some people - that was not our purpose or intent.

We're working on it. Our new CEO, M linden, is a great communicator. And we're striving to get better. Thanks for your patience. We definitely grew a lot faster than we were ready for for a long time. We're catching up now & I'm optimistic about the future.

I completely agree - this would be wonderful. We're hiring as fast as we can and applying resources to the most critical things that we can as fast as possible. We'll get there. I'm sure. Will it be soon, unfortunately not. Thanks for your patience.

I'm certain Microsoft is paying VAT they may have implemented it in the more clever way suggested by the post I just commented on. We'll get there. Right now though I'd rather have engineers focused on stability than the billing system. Know what I mean?

With the way you have implemented VAT, I'm not totally sure you actually do comply.

For example, you are not charging VAT in concierge billing (conversion to openspace, region transfers) or LindeX fees. Are you absorbing the cost of VAT on these ? It just doesn't seem consistent.

Also, the way the system works for VAT exempt companies is this:
- The company pays it's suppliers the general public retail price
- Supplier refunds the company based on local VAT rate

To be VAT exempt, a company must charge VAT in it's own retail price (including formal bills or receipts). There is no formal billing process in SL right now, so for example an SL land rental business cannot be tax-exempt unless it uses RL billing transactions.

Finally, as a land rental business, I receive payments in L$ which I convert to USD to pay LL. As a european citizen, I never pay anything in EUR. My customers simply pay LL, through me, and I take what's left. The only transaction in EUR is between paypal and my bank account when I cash out, and in this cas the exchange rate is absolutely not in my favor.

So not only are we at a disadvantage because we have to pay 20% more than other land owners, but we also are at a disadvantage when we cash out the little money we made by renting the land (if any is left). This second disadvantage is not LL's fault though.

If you allowed region fees to be paid in L$ as an in-game transaction, there would be no need for all the VAT mess and all residents would be on a level field. It would definitely provide a boost to your european market and increase your revenue accordingly. Look at how many europeans have been put off land ownership because of the unfair disadvantage they have.

I think we could manage it within the economy safely. It would cause us to have to sell more Linden Dollars on the LindeX. If we did that, EU residents would buy more L$ and we'd have to start charging VAT on those transactions.

Nothing is certain except death and taxes, unfortunately.

Yes.
Stability isnt the cause zee (laughs..) only this fuc**ng VAT. It is stable since server
version 2.xx

\edit
upposing mode on:
Perhaps MS (like others like MS) has a few lobbyists at the EU council what prevent them to pay excessive VAT. (A naugthy little beggar who thinks bad about this, as we say)
upposing mode off:

We only need to charge VAT on electronically supplied services per the directive. Concierge fees are services provided by a human. These are not supplied electronically so no VAT is applicable. That's my understanding from my (expensive and usually boring) experts at the Big 4.

?? If you can safely charge us tier inworld then do it. We'll deal with the consequences after if it's not going to cause inflation or devaluation of the Linden dollar.

also, just a side note here folks, as blogged at http://status.secondlifegrid.net/2008/08/01/post181/ the two figures for Total Resident-owned L$ Supply and for MTD Island growth had been incorrect for two days on http://secondlife.com/whatis/economy_stats.php . I appreciate the eagle-eyes that pointed this out on this forum and a couple other posts as well, we found the source this morning and had the stats corrected this afternoon. Thanks for your help, and I'm sorry about the brief problem. If you have questions about this or any other public stats, please feel free to IM or email me directly.

/me doesn't have a VAT issue. Just wanna say thanks to Zee (edit: and Meta!) for taking the time to do this and that I hope other Management Lindens will do similar things in the future. In particular, there's increased grumbling about governance issues ("banned but don't know why" here lately and, more personally, I'm pretty annoyed with support this week - had a ticket open for 4 months that just got closed without any comment. As a conceirge-tier-paying customer, I had hoped for more. I'm not asking for VPs to come here and address specific cases but I do think more Lindens in the forums is a really good thing, for both sides.

Yeah, the forums are a bit of a zoo but we're better than the blog comments.

PS: can I have a bear?

The only part of Lindex transactions that should be VAT-able is the transaction fee. Even if the VAT was 100%, that would only take the fee for buying up to 60 cents per transaction, and I think the EU residents would be pretty happy with that as compared to what they are paying now.

But why? The LindeX is supposed to be a vehicle for trades between residents, e.g., my sell order is filled by someone buying it. Is it because of Supply Linden's activities? Couldn't you just program it so that European accounts always buy from another resident, and not Supply Linden?

"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."

I would say the opposite. AS A RESULT, LL CAN DEFINITELY AFFORD TO ABSORB THESE COSTS FOR EUROPEAN RESIDENTS.

Presuming an average 20% VAT cost, Linden Lab would retain 80% of the revenues from its expanded European operation. Presuming non-EU markets account for 50% of global revenues, absorbing VAT would cost Linden Lab 10% of its global revenues.

Are you saying that your global margins are so damaged by VAT that you are willing to SACRIFICE your multi-quadrupled European customer base by passing the VAT problem onto them? Are you telling us, in fact, that VAT has destroyed your entire European operation?

Bottom line: either Linden Lab remains profitable after absorbing VAT or it does not. If so then you have willfully harmed your European customers; if not then Linden Lab has been screwed by the European Union. Which is it?

Surely VAT would only apply to the transaction FEE of $0.30, which is what LL is charging for the service. That's $0.06 per transaction, which is a reasonable price to pay if it allows a level playing field and provides a general boost to 30% of your user base. Way to go.

Actually, as I said above, the fact that there is no VAT on LindeX transaction fees does seem a bit dodgy.

The cost of hiring people and developing software isn't going to be 20% cheaper. They cannot absorb it without taking a discount on their basic fee, which they get in full from everyone else. And they are not willing to charge everyone else more to cover your government's onerous tax. It is a backhanded slap foisted on you by your government. LL is trying to abide by the law, it's just unfortunate that the law doesn't contemplate an economy like this.

EITHER LINDEN LAB REMAINS PROFITABLE AFTER ABSORBING VAT OR IT DOES NOT.

If so then LL has willfully harmed its European customers; if not then Linden Lab has been screwed by the European Union.

Which is it?