The Guardian: Amazon overholding on VAT for UK publishers?

The Guardian: Amazon overholding on VAT for UK publishers?

I think this

Guardian article

will have a negative impact on Amazon’s perception by the public in the UK, even though the issue is a bit mathy and wonky.

In the USA, we have sales taxes and “use taxes”, when it comes to purchasing e-books from Amazon. The basic idea is that either there is a tax on the sale of an item, or, if you buy it from outside your state and then bring it in and use it there, the state may charge you a tax for using it.

It’s very inconsistent, with different states (and counties, and even cities in some cases), charging different rates…I’ve heard that there are over 8,000 tax jurisdictions.

Still, the idea is the same: the actual sale of the product within your state is taxed, or your use of it is.

Not all states tax e-books delivered electronically, though, sort of the same idea as not taxing a contract.

In Europe, Australia, and other places, there isn’t a sales tax…there is a Value Added Tax (VAT).

The idea there is that you are taxed when the value of something is increased. Just making up numbers, let’s say a tree is worth $100. You chop it down, turn it into lumber (let’s say ten boards), and it’s worth $250. You would be taxed on that $150 difference.  Now, one of those $25 boards is turned into a table that sells for $100. The company that did that would owe tax on the additional $75 value. That’s the basic idea.

I’m honestly not very familiar with the European implementation of that idea. I know when I visited Australia, the price on the menu or on the price tag was the price I paid: there was nothing visually added to what I paid in the form of a tax. That was quite some time ago, though, and I’m not sure it’s the same in Europe.

I do know, though, that there are different rates of VAT in different countries, and that VAT impacts the consumer prices of e-books paid by customers.

In the USA, the amount of sales tax collected at the time of sale depends on where the customer is located (based on the customer’s account). I’m in California, and we aren’t taxed on e-books delivered electronically, so the price I see is the price I pay. In other states, it might be 5%, 8%, and so on.

According to the Guardian article, the UK VAT rate is 20%…and the Luxembourg VAT rate is 3%.

Here’s the thing.

Again, according to that Guardian article, Amazon withholds 20% from the money it pays a UK publisher to cover that VAT. Let’s say that the list price of the e-book is $10. Maybe Amazon would normally pay them $5, but they only pay them $3 (so they have the other $2 to give to the government in the UK).

On the surface, that makes sense. In the USA, Amazon collects the money from the customer and sends it to the state, but again, that’s a sales tax, not VAT.

However…

The article says that Amazon only pays the government the Luxembourg rate of 3%, because that’s where they are based.

If, and that’s a very big if to me, that’s the case…what happens to the other 17%?

Now, I don’t understand the mechanics of this enough. If a UK customer buys something from a Luxembourg seller over the internet, does the VAT happen in Luxembourg, or in the UK (the latter being what would happen in the USA traditionally)?

The article by Ian Griffiths and Dan Milmo (which I recommend) has a lot more to say about Amazon’s dominance in the market. It suggests that there are situations where UK publishers might get only 10% of the consumer purchase price on an e-book sold by Amazon.

Now, movie theatres in the USA can run into that same situation with blockbuster movies…you pay $8 at the box office, and the theatre gets eighty cents of that. However, they can make it up with that $5 box of popcorn. ;)

I don’t know how influential this article will be with the public, but regardless of  how the mechanics actually play out, it’s quite negative about Amazon.

If you have insight on how VAT works in Europe, I’d love it if you comment on this post for me and my readers. Would what Amazon is alleged to have done be unfair? Would Amazon actually pay that 20% to the UK, even though they are based in Luxembourg? Do you just have an opinion about this? Feel free to let me know.

This post by Bufo Calvin originally appeared in the I Love My Kindle blog.

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2 Responses to “The Guardian: Amazon overholding on VAT for UK publishers?”

  1. Edward Boyhan Says:

    I’m not a tax expert by any means, but I suspect that there a couple of errors in the Guardian’s analysis. I refer you to the following:

    http://en.wikipedia.org/wiki/European_Union_value_added_tax

    First Luxembourg VAT is 15% not generally 3% (only for certain exceptions which I don’t believe covers Amazon). Final (output) sales to consumers are charged the VAT rate of the consumers domicile not that of the supplier. Ebooks could be regarded as a “service” in which case the VAT would be at the rate of the domicile of the supplier — except that there is a long laundry list of exceptions where the VAT applied is that of the consumer’s locale. Most of these exceptions include almost all of the services that a normal person might utilize including “electronic” services i.e. ebooks..

    Notwithstanding all of that what the Guardian appears to be talking about is not really the actual VAT collected and/or paid to a governmental entity, but rather the negotiation between Amazon and a publisher over what Amazon will pay the publisher for their product (sounded like a consignment rather than an agency discussion to me). As part of this negotiation Amazon would include a VAT rate that they would have to pay upon final sale as part of a “discount” in arriving at a reasonable consignment price. The final price paid by the consumer would be: consignment price+Amazon markup/down+VAT. In this kind of negotiation where most of Amazon’s sales are English language product sold mostly to UK citizens using the UK VAT rate of 20% appears to be quite reasonable.

    The article then ends with a screed about how Amazon pay $0 on the profits earned from UK consumers, which evidences a poor understanding of the theory and practice of corporate taxation worldwide, which is a complex subject. Generally with the exception of the US (which taxes worldwide income no matter where earned), you pay your corporate taxes wherever the corporation is domiciled or has physical facilities. Which in the EU for Amazon is Luxembourg. Those EU earnings are added to their US taxable earnings (they get a credit for whatever they paid Luxembourg) for purposes of US corporate income taxes.

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