U.S.-based small businesses that sell certain digital products within European Union countries need to account for new value-added tax (VAT) regulations.
The new VAT rules went into effect on Jan. 1, 2015, and apply to companies selling digital products within any EU member country.
There are 28 EU countries in all: Austria, Belgium, Bulgaria, Croatia, Republic of Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the U.K.
The new Value Added Tax rates cover a broad range of digital products. The list includes software, digital photos, screensavers and ebooks — as well as music, films, games and online magazines.
Web hosting and other online services — including selling advertising space on a website — also require compliance with the new guidelines.
The VAT tax was implemented in large part because large companies such as Amazon are known to funnel their EU sales through a corporate subsidiary based in a single EU country with an extremely low VAT rate — Luxembourg, in Amazon’s case — to keep taxes low.
The new rules force companies such as Amazon to register for VAT in every country in which it sells products so that each EU member state can get its fair share of tax money.
But the Value Added Tax is not limited to the Amazons of the world. If you are a U.S.-based small business selling digital products in the EU, you need to comply with the new VAT rules, too, according to the EU’s official VAT fact sheet.
To do so requires first identifying each of your EU customers’ locations, including address.
Then, you must gather proof of each customer’s location based on two correlating pieces of evidence, such as a billing address and matching IP address. Proof of location must be stored for 10 years.
Your company then submits a quarterly VAT return to each EU state and pays it.
You can choose to use a MOSS (mini-one-stop-shop) to report to each EU state for you. MOSS systems collect and distribute the VAT for companies based outside the EU.
The benefit of using MOSS is that you don’t have to VAT-register in each country. However, MOSS is not a “magic bullet” solution because, while it registers you with the necessary tax authorities and distributes any VAT you owe for you, it doesn’t collect and store the two pieces of proof of location you need for each customer.
And you still need to know the applicable VAT rate for each sale. Rates vary not only with each EU member nation but also with different kinds of products. Additional information about MOSS is available on the Web from sources like this page posted on a UK government site.
The Value Added Tax overall is a difficult pill to swallow. One criticism is that there’s no clear definition of precisely which products fall under the new tax, so each EU country interprets the product categories differently. Also, each EU country is divided into zones.
The result of this complexity means there are actually 81 VAT rates. Those interested in reading specifics of the guidelines can peruse (PDF) the VAT’s explanatory notes.
Third-party platforms have arisen with offers to solve all your VAT problems — for a fee, of course.
But some cloud-based eCommerce platforms also have emerged to assist small businesses suddenly faced with VAT — at no charge.
One of them is San Diego, California-based Ecwid, an add-on eCommerce platform.
The company keeps an eye on new VAT guidelines on its official blog, where it notes:
“As a small business owner, the new rules present you with some difficult challenges that we’re prepared to help you navigate and comply.”
Ecwid provides a virtual shopping cart that seamlessly integrates with a merchant’s existing online presence via the inclusion of a few lines of code. Available free of charge (without set-up or transaction fees), Ecwid also provides three step-up plans for businesses seeking support and additional features. Monthly prices are $15, $35 and $99.
Ecwid offers the functionality to set VAT rates in three steps via Ecwid’s control panel. First, you create the VAT tax itself and name it. Next, you create a “destination zone” for each EU country (totaling 28), then add each country’s zones, as well as each zone’s VAT rate.
Also, by using Ecwid’s “defined by billing address” feature you have a mechanism to gather and store the location of each customer. (Their IP address is automatically stored when they visit your website or eCommerce site.
A full list of Value Added Tax rates are available on VATlive.com here.
European Parliament Building Photo via Shutterstock