September 27, 2007 by Nobody Fugazi
Posted in
As noted in this comment, EU citizen's now get to help support the EU with their purchases and tier in Second Life through [w:VAT]! And it was a surprise, which makes it that much more special! It wasn't even announced on the Official Second Life blog, which certainly means it is wonderful information that probably should have been shared.
Seriously, that sucks for EU users. For EU based businesses internal to Second Life, this means additional costs which makes them less competitive - and since the majority of users in Second Life seem to be coming from the European Union, this may drastically alter the economy in a very short period of time.
Because of all of this and the comments and IMs I have received, I did some digging. Zal Chavelier passed me the link regarding VAT in Second Life. I read up on EU VAT. And then I started searching for more information based on what I found... and I found that the European Union had decided in 2003 that VAT should be applied to 'Electronically Supplied Services', which includes:
- supply of websites or web-hosting services;
- downloaded software (including updates of software);
- downloaded images, text or information, including making databases available;
- digitised books or other electronic publications;
- downloaded music, films or games;
- electronic auctions; or
- Internet service packages.
Out-Law.com has some more information on E-commerce VAT changes for non-EU businesses, with those changes being effective July 1st, 2007.
So - while Linden Lab didn't say anything (again), it isn't their fault that VAT is being applied. It is the fault of the EU. What is interesting to note here is that the EU's choices have made their own citizens less competitive within metaverse related projects, which would encompass more than Second Life. It would seem other virtual worlds will have to do similar things to comply with EU law.
Self limiting, perhaps, but I'm betting that the EU doesn't have meetings in virtual worlds yet. I'd say that some EU citizens may think twice about buying land or even renewing their premium accounts (if they have them).
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Raymond posted this on SLU,
Raymond posted this on SLU, and he pulled it from the official forums and its a good post, So I'm posting a 3rd time here because it has a lot of great points.
"Anyone who thinks this is an overnight decision or the last couple of
days week or month is sadly misinformed about VAT registration and
liability.
For a company the financial size of LL and with a Chief Financial
Officer (Zee Linden) who I suggest people research his RL profile, this
decision must have been in the offing for at least 3 months to be able
to set it up as well as it is.
Billing being able to introduce into the software the necessary
routines to work out who is liable and who isn't for instance. Just one
complicated and time consuming change. There would have been bank
meetings and revenue office meetings and routines to apply and not even
the slightest whisper from Linden Labs.
No doubt one of the Linden employees will read these posts, you know
nothing of human behavior, of customer care and you only deserve my
contempt for the way you have treated your European customers. Today I
own 10 sims shortly I will own none it looks like, as on researching
the VAT site we are starting to find our registration may be rejected
as we do not meet their strict criteria. So if we cannot register we
cannot charge, and therefore cannot claim back our own VAT payments
that LL will take.
LL you deserve to lose your sl world over this latest debacle and if
that is the final outcome of this move my sympathy goes out to all
those who lose this fantastic world due to your callous behavior"
--Femina Matahari
Thats a good post.
The EU really painted themselves in a corner, but Linden Lab really shot themselves in the foot with the way things have been handled.
There wasn't even the usual ambiguity.
Community does rapidly seem to be becoming an afterthought to LL. I don't think it is conscious, but even unconscious it is demonstrative that the community is not being factored into decisions at many levels.
I, for one, am not happy that EU folks have been side-swiped in this manner.
Second Life Consultant
One more question...
I take it that VAT will not be collected against transactions conducted in Linoleums if there's no "official" way to establish an exchange rate for them? Or will the EU collect in Lindens.
Doesn't this create yet another incentive to remain unconfirmed, to purchase land only out of in-world earnings, and to own land only in the Estates that accept tier in Lindens, at least until LL see's fit to accept tier and other charges in the form of Lindens rather than some national or transnational currency? Seems like it's time for mainland owners to insist on tier payment parity with the estate landowners?
VAT would have to be paid...
In the currency of the nation to be paid. No, I don't think that governments will be sent their VAT in Lindens.
Though that is a very funny thought...
Second Life Consultant
Do they get paid if value added is negative?
Not knowing how VAT works (and having gotten a headache every time I've tried to understand the concepts of VATs) I have what's probably a really idiotic question. If an SL-based business runs at a consistent loss, would they therefore get a subsidy via VAT? I mean, so far in my SL I've not managed to make anything resembling a profit, since I never ran a casino, a strip club or farmed healthy little crops of softcore-porn ads. Considering the freefall in land prices, I'm guessing not a lot of EU netizens are going to be posting profits this year.
But I'm guessing that the "value added" in VATs has more to do with the value added to bureaucratic budgets than it has to do with whether a thing "purchased" has any intrinsic value of its own? Would love to see comment on this from our EU buddies.
VAT is applied to goods
VAT is applied to goods bought and sold. I buy goods I am charged VAT (everything pretty much in the UK is charged 17.5% VAT) at a consumer level. (not all international goods are, i guess they should be though!). If I happen to be a VAT registered LEGAL company with filed accounts there are a number of things i can do. I can claim back a flat rate 4.5% of the VAT. I can claim back the VAT on every purchase I make assuming I get a VAT legal invoice from the supplier. I can also charge VAT on services i provide.
Here is where it gets interesting, subject to the law, if I charge Rent within the game (which is not VAT'd because its not money right...) thats ok. However if i was running a private island I *should* charge VAT on the USD land tiers paid via payal. This is ofcourse if i was a company that was VAT registered. If i make less than £64,000 per annum, I dont have to charge VAT (but i still pay it on stuff i buy).
So in theory if i was a company that bought and sold the exact same amount of VAT chargeable goods each month in the EU i would be VAT neutral. I'd also be a charity.
Profit and VAT are not related. You can offset loss making versus Company Taxation, but the best than can get you is a zero tax bill. But to offset the tax for that, you'd have to have employee's... and that would incure employer NI contribution....
I dont really mind paying the VAT, its the law. I mind being suprised. I mind they implemented it 1 day before my tier was due and applied it. I mind that they arent applying local sales taxes across the entire population. Isn't it pretty much 5% across most of the states.
I also mind that they are assuming that from my IP address and that I registered as being in the UK. That this part of my life operates out of the UK. I could easily form a shell company to run this out of from somewhere tax neutral.
Needless to say if the VAT invoice of sale i recieve from Linden Labs is not Legal. I will be reporting them to the VAT office in the UK.
Without notice.
Zal
US Sales Taxes
State sales taxes are highly variable, though 5% is probably a fair guess at the national average. But added to the complications are the fact that different states have wildly different laws concerning the nature of items on which sales tax is payable. Some includes food, some don't. Some of those that exempt food items from sales tax are very odd in their definitions of what is and what isn't food. Reading matter is another item taxable some places, exempt in others. I believe very few online vendors in the US collect sales tax, unless they also sell the same goods in brick & mortar stores within the state in the individual customer uses as a billing address. Not sure of all the reasons why, but many states now expect customers themselves to include any unpaid sales taxes as part of their state income tax. Of course, everybody keeps detailed records delineating which of their online purchases are and are not taxable according to their home state.
Yes, here comes granny the bus again.
Bad move by LL to not even
Bad move by LL to not even blog this or offer a warning.
Canadian GST Next?
We don't have VAT in Canada, we have 6% GST instead! Hopefully LLabs will not bill GST to Canadian av's like myself. Oops! Shouldn't have given them the idea!
ArminasX Saiman
Yeah, I was thinking about that...
Many countries have VAT; I'm not sure that Canada would go the route of the ESS stuff mentioned - it gives as good as it gets (as I believe the EU does).
Frankly, I think it is a pretty stupid law. It was probably created to discourage buying things over the web which could be had locally... because I expect that companies within the EU would have to charge VAT. What this law does is actually raise costs due to administrative costs and puts EU citizens on a less competitive basis when it comes to microtransactions.
Second Life Consultant
I like(d) my Second Life.
I like(d) my Second Life. Virtual freedom to be or not be what or who you are in real life. Today I start paying VAT over transactions with a US entity, which is not the fault of LL, though they could have provided some warning or note out of courtesy. They were not obliged to do so, as we are required to abide by the laws of the territory we reside in, but it would have been "nice".
To answer the question of someone who wanted to know if a business running a loss would be able to recoup the VAT, the answer is a partial yes. If they are registered as a business, they would be able to do so. As an individual, you never can.
Referring to the poster who talks about a 6% tax in Canada which is not being charged (based on his statement), that could be a case for international tax lawyers, I'm not up to date on those.
For the record, I wouldn't even mind paying a 6% tax, but EU VAT is between 17% and 21% depending on the country you reside in I believe.
European "players" lose here and are now at a serious competitive disadvantage when compared to those who are (for now) exempt from being taxed.
For the time being I've raised my tier costs to reflect this new development, but I'm seriously considering dropping all my SL activities and stepping out.
Right now we get all the laws that limit us, but none of the laws that offer protection. Ain't it fun?
ServMe Nakamura
virtualSecond CEO
There's a quote:
'Right now we get all the laws that limit us, but none of the laws that offer protection. Ain't it fun?'
Second Life Consultant