Episode 45 is the third of four shows in a series on eCommerce and Sales Taxes. In this show, we talk with Colin Matthews, Senior Manager of Solution Consulting and Matthew Harrison, Sales Delivery Consultant, both at Avalara, who is the sponsor for this series.
Colin and Matthew are based in the UK and serve Europe, the Middle East and Africa. The topic is VAT—Value Added Tax— and we discuss the implications that will affect you as a store owner if you sell to or from any country that has implemented the VAT. It’s something you will need to know in order to add to your tax compliance if you are selling online.
We chatted about:
- The differences between VAT and sales taxes
- What you need to consider when shipping goods to the EU from the US
- Downloads, streaming and other digital services and whether the rules differ for those
- The things you need to consider when shipping goods from the EU to the US
- What services are available to help you with determination and compliance when it comes to the VAT
If you want a recap of the differences between VAT and sales tax, visit this post over on Avalara.com.
Learn even more about the VAT over on Avalara VATlive.com
Thanks to Our Podcast Sponsor: Avalara
Bob Dunn: Welcome to The WP eCommerce show. A podcast about everything eCommerce and WordPress. Hey everyone, welcome to our show. Bob Dunn here, also known as BobWP on the web. Today is part three of our four-part eCommerce sales tax series, brought to you by our sponsor Avalara. Although sales taxes for your online business is not the most sexy subject, it’s one that you need to know, as its a huge part of the success of your online store and that is why we are so excited to bring you this series.
On the first show, we talked about the bigger picture of the sales tax essentials needed for online small businesses. On the second show, we clarified online services and what you should be aware of when and if you need to collect sales tax. Today we are going across the pond and learning more about the Value Added Tax, VAT, and how it affects you. We all know that with online sales, you are able to reach even more customers abroad, but at the same time you need to understand what taxes you may need to be preparing for and collecting for. To learn all about this, we have Colin Matthews, senior manager, solution consulting, and Matthew Harrison, sales delivery consultant. Both serve the EMEA, which, if you are not familiar with, is an acronym for Europe, Middle East, and Africa. I’d like to welcome you both to the show today.
Colin Matthews: Hi, Bob.
Matthew Harrison: Hi, Bob.
How is VAT different from sales tax?
Bob Dunn: I know that VAT has been on a lot of people’s minds for a while, over in the states here. People were trying to understand it and some got very confused. There has been a lot of talk about it since its inception. For my listeners, I really want to dive in and clarify this and I’m going to start with the very first question. We’re just going to get right into it, get this all figured out. How does VAT differ from sales tax? Most of us understand sales tax to some effect, but how does it really differ from sales tax?
Colin Matthews: They’re both complicated for their own reasons. It sounds like you’ve had a couple of sessions or shows already on the complexities of sales tax. With sales tax, the complications are around the sheer number of taxable jurisdictions in the US and there are so many different taxes in those jurisdictions; you know, federal, state, and city level taxes. It’s pinpointing simply the rate you should apply in any given transaction. You know the taxable location is destination, so that side of it is quite straightforward.
For VAT, the issue is more around the place, supplier, and liability concepts. It’s not so much a rate issue, we only have three rates per country, some exceptions with four rates. It’s knowing where to tax and who is liable for paying the tax on that supply. We have to go through a process when reviewing any VAT invoice to fully understand what’s applicable. We need to understand who the trading partners are and what their taxable status is. Is it a B-to-B or a B-to-C supply? Then you need to know what’s being supplied. There are certain rules around goods and services: they’re treated differently. Then there are exceptions to general rules of goods and services to fully understand. Then what the place of that supply, so, where the place of that supply is taxable. When you know where the place supply is taxable, you need to understand whether exemptions apply. Finally, if it’s the supplier or customer who is responsible for paying the VAT on that transaction.
As a complexity, the EU is a single market that consists of 28 member states. We have a directive set EU level that has 412 articles that member states must follow. Some of those articles are provisions that you cannot derogate from. Some of them, the member state can derogate from, which means that the VAT legislation in France can be very different to the VAT legislation in Germany, as an example. The complexities are around those rules that can vary from country to country. That’s not considering the fact that we have 21 different languages, 11 different currencies. VAT returns from 6 boxes in Ireland to 586 boxes in Italy, you know, it’s trying to manage all of those different countries and national legislation in one European single market.
Bob Dunn: Obviously, we aren’t talking about something that is simpler than the sales tax here in the states, or anything simpler around taxes, right? It seems like there are just as many complications through the VAT.
Colin Matthews: Absolutely, yeah. We speak to guys all day every day who call us with questions and they’re amazed at the complexity.
What to consider when shipping goods to the EU from the US
Bob Dunn: If you’re wanting to actually start shipping goods to the EU from the US, what are your considerations there?
Matthew Harrison: The first consideration you need to make is who’s the importer on record for those goods. If you were to list your customer as the importer on record, then you have no obligation to register because your customer will pay the import VAT and the import duties before receiving the product. If you list yourselves as the importer on record, then you have various other different things to consider. You would need to obtain an EORI number, which allows you to import into the EU. You only need one of these numbers to go to import in any country within the EU. You have to consider landing costs, so you’ve got, obviously, the VAT, the duties, the shipping, the insurance when shipping those goods. You also have to consider the LVCR. In some instances, if your goods are of a really small value, there is actually no duty, no VAT due on those goods within countries … The small value is between around 10 and 22 Euros. That doesn’t mean that if your product is between that value and you’re shipping hundreds of those, that you can take advantage of that over-simplification. It just means that if you are shipping individual products of that small value, you can not pay the VAT and the duties on those products.
Colin Matthews: Yeah, maybe I’d just add, as well, so Matt’s just explained the options you’ve got as an importer or somebody that sells goods into the EU. Either you or your customer acts as the importer of record. You have different obligations between the two. Also, you could name the customer as the importer of record. They have your freight forwarder manage the administration of what to do. That way, your customer knows up front what VAT and duties are due on that transaction because you collect that amount as part of the checkout process so they don’t receive any nasty surprises when the goods arrive to their door. You also, then, have no reporting burden in the country of destination.
Matthew Harrison: It gives a great customer experience for those people. We’ve had many, many situations that we’ve dealt with where customers receive products and they can often pay 30 to 40% more than they thought they were buying the product for, so it’s really, really clear for repeat business, it’s something that clients really, really need to consider.
VAT considerations when warehousing and selling from EU locations
Bob Dunn: What if I decide to warehouse the goods in the EU as opposed to, you know, shipping them from the US, and sell them from that location? What are the implications there?
Matthew Harrison: The first implication is that for any country where you’re storing stock and selling it to consumers within the EU, you would need to be registered from the first transaction because trading as a non-resident, there are no thresholds. The first thing you’d need to consider is where you were storing your stock. That creates the tax obligation. Many companies decide to have different warehouses. There’s different types of simplifications that they can take advantage of. For example, in the Netherlands, if they want to defer any import VAT, a lot of clients decide that they want to have one central warehouse. They want one to defer all the import VAT if they’ve got a large amount of products. The Netherlands is a great example of that. Once they have their goods located , say, one country within the EU, they can then freely sell to any consumer around the EU charging their current local rate of tax.
Colin Matthews: I suppose just to add to that slightly, as Matt’s explained, once you’ve stored those goods in the EU, you’re obliged to get that VAT registration number up, because that’s similar to the Nexus principle in the US. If you have goods stored in a state in the US, that creates an excess of the sales tax in that state. Same applies for VAT. If you have goods in the Netherlands, you need to get a VAT number straight away. Once the goods are in the EU, they’re free to move around the EU to other locations without having to pay more VAT or duties again because they’re in the single market, the freedom of movement of goods. If you are, then, going to store those goods as an eCommerce seller and you’re going to sell from that location to individuals around the EU, you need to be wary of the distance-selling thresholds. If you’re going to sell, for instance, from the Netherlands to consumers in the other 27 member states, then initially, you’re going to need to charge the rate of VAT of origin, which is 21% if we’re looking at Netherlands.
When tracking the volume of your sales throughout the calendar year, if you exceed the distance-selling threshold into country of destination, so that’s the country in which the goods are shipped to, then you also need to additionally register in that country. As an example, if we look at France where the distance-selling threshold is 35,000 Euros, if we sell over 35,000 Euros within that calendar year, we need to stop charging Dutch VAT at 21%. We instead need to get a VAT number in France and then start charging French VAT at 20%. The reason behind this is, essentially, the EU wants to tax where those goods are consumed, where the individual buys and receives those goods. There are a significant number of smaller sellers, so your small office, home office-type sellers, to restrict the compliance burden on those sellers having to VAT register in all of the countries in the EU, they have these distance-selling thresholds to make it slightly easier for them.
Are the VAT rules different for sales of digital services?
Bob Dunn: Now, we’ve been talking about goods mostly so far. Of course, there’s digital services: downloads, streaming, all that good stuff. As far as a VAT, are the rules different for digital services versus goods?
Colin Matthews: Yes, they are. I mentioned in question one the place, supplier, and liability concept for VAT and that when you’re determining the place and supplier, you need to look at what’s being supplied. Is it a good or a service? Now, a digital service has its own set of the rules. Another example of digital service is a service supplied electronically, so it could be downloadable content or streaming, broadcasting services and telecommunication services. When supplying our services to an individual, so, again, as an eCommerce supply, the place of supply is where the customer resides. If you’re a US seller and you supply streaming services to individuals, perhaps broadcasts, sports, whatever it is, to individuals in EU, then you need to be charging the rate of VAT in the country in which that customer resides. 19% German VAT to a German individual, 20% VAT to a UK individual. This is a rule that’s been in place since 2003, but was updated in 2015.
To try to simplify the reporting process for these sellers, EU introduced in 2015 the Mini One-Stop Shop scheme. What that allows you to do is to report all of the VAT collected from all of your customers throughout the EU, you know, there are 28 member states and you could have thousands of customers. That would be an extremely burdensome compliance operation to manage those 28 VAT numbers. It allows you to register just in one country. You can register in a country of your choice, so perhaps the UK, and declare all of your sales to all of your customers in the EU through that tax office. When you submit that Mini One-Stop Shop, or MOSS, return and pay the amount due, the tax office will then disperse and settle any amounts due to the other 27 member states.
How to determine where your customer is located
This is often a question, so I should just mention it. In order to determine where your customer is located, which is, of course, the rate you need to charge, you can do one of two things. If it falls in the presumption list, which is, there are, I think, five or six presumptions that you can assume or presume that your customer resides in that country, such as using internet services in an internet café. It would take the IP address of that café and assume or presume that’s where the service was consumed. If it doesn’t fall in that presumption list, then you need two non-contradictory pieces of information, which can be a credit card billing address or an IP address, to determine where that customer resides or consumes that service.
Are countries outside the EU implementing VAT on digital services?
Matthew Harrison: Now, Colin’s discussed EU for digital services, but also, there’s an increasing number of countries that are introducing digital services for the non-EU based. To name a few that have already introduced that: Japan, Korea, South Africa, Norway, and New Zealand. There’s also a number of countries that are looking to implement this tax because the taxed businesses are realizing that this is a market that they can easily scope out a product that they can develop for more tax. In January, Russia and Switzerland are looking to implement digital services, VAT on digital services, and in July, Australia will be doing exactly the same. It’s only going to be a matter of time before a number of other countries continue to implement VAT on digital services to consumers.
Colin Matthews: I think this is just an example that technology evolves far quicker than tax offices can write legislation. It’s much easier now to sell services around the world to anybody. It’s very difficult for the tax offices to keep up, so we’re seeing more and more countries are now actually going to start taxing, now, as Matt just said, and there are several introducing next year.
Things to consider when shipping goods from the EU to the US
Bob Dunn: That makes a lot of sense because I know that everybody gets all excited because of the reason that hey, if I sell online, I have the world at my fingertips. Throw in all these taxes, that definitely gets people rethinking it and realizing it’s more than just throwing stuff up on the web. This is a lot of good information you’ve given us so far. I’m going to kind of slip back to shipping goods. I know I said, okay, now let’s move to digital services, but we’ve talked about shipping them from the EU to the US and then also having them warehoused in the EU and selling them from that location. Now, the third scenario. What do I need to consider when shipping goods from the EU to the US?
Matthew Harrison: As we discussed before about the imports on record, this is again important on the other side. If you’re shipping goods from the EU to the US, you need to establish who’s the exporter on record from the goods within the EU. Now, if you’re buying goods from a certain supplier and they are going to be the exporter on record, then the sale happens outside of the EU, so then you would then not need to register for tax inside the EU. If you are listing yourself as the exporter on record, that means that you make a domestic purchase for those goods, which you will often have VAT on. What you’re going to need to do is register to one, report the export that you’ll be making out of that country and also recover the VAT that will be on the transaction. Being the exporter on record doesn’t mean that you have to report the transaction and register in every single instance.
This is a common misconception for a lot of clients. They think that they can just purchase goods and then recover the VAT in a different way. On the other side, on the US, I’m sure it’s discussed in your other meetings, but there’s a non-chargeable amount. If your goods are shipped over there and they’re less than $850, then you won’t pay any customs charges on those goods. Again, once the goods are inside the US, you don’t need to look to the US rules. If you’re going to start selling goods in the US, you just have to look to the sales taxes.
Colin Matthews: Yeah, this brings us back to Nexus. It’s very important to the US. You need to look at the Nexus rules for that state and then, of course, you come back to the complications for US sales tax, I guess.
It’s complicated: where can my listeners get help?
Bob Dunn: Yes, it’s complicated. That’s like everything else we’ve talked about in the last two shows. There are so many scenarios, so many things to consider, and a lot of my listeners are now saying, “Oh my God. I can’t handle this. This is just too much. I need to focus on what I do.” Now, I’m going to ask you, you both work for Avalara. I know all the great stuff Avalara does, I know all the resources out there, what services are available to assist with the determination and compliance because a lot of people are going to realize that hey, I don’t want to become a tax person. I want to do my business. I want to do it well.
Colin Matthews: It sounds like you’ve spoken to Avalara in the last two calls. I hope I don’t repeat what they’ve already answered in this area. We’re an indirect tax solution company. We have several products that can assist with this. Whether that’s for a tax engine that can calculate the sales tax that’s due on a transaction within the US or whether it’s a VAT engine that calculates VAT on a cross-borders supply internationally. Of course, if you’re shipping goods internationally, you also need to understand what the landing cost might be.
Matt mentioned earlier that if you or your customer is going to be the importer of record, then it’s important that you know what’s due when the customer’s agent asks for their payments. We have two tools. In fact, we have one tool that serves both purposes. The tax engine can take your scenario, or sorry, listener’s scenario, take facts from that scenario to understand where the goods are being shipped from and to, who they’re being shipped to, so is it a business or a consumer, in which country they’ve been imported into, who the import of record is.
Once it understands all that information, it returns the correct VAT and duty treatment for that transaction. That takes away the use of tax tables, it takes away the use of trying to manage different indirect tax systems. You know, sales tax versus VAT versus GST. It takes away understanding local legislation. You’ve mentioned this, you know, a VAT directed with 28 different versions of it, it takes all of that away and manages it through one tax engine.
Once you’ve done that, of course, you’ve performed the calculation, you know what’s due, you know where it’s due, but how do you physically submit the tax and declare that transaction to the authorities? We have a compliance service, a professional service team in our Brighton office in the UK that essentially coordinates and manages all of our clients’ VAT reporting throughout the EU and beyond. They take all of your transactions, they prepare the returns, they work out whether it’s accurate and raise questions if it appears to be inaccurate, and then submit their forms to the local tax office and then provide payment memos to allow you to pay the amount due. We contact the tax office to make sure that all of our clients are compliant going forward.
Questions? Send them here.
Bob Dunn: Well, you’ve pretty much, I think, covered it all and I think you’ve given us a clearer picture. I’m sure there are other questions people have that could actually contact you and learn more about VAT or any of their tax needs. I just want to thank both Colin and Matt for joining us today to help us understand more about the Value Added Tax, which has been a mystery to a lot of people, and how it can and will affect you as a store owner, or really, anyone selling online. Thank you, again, for taking the time today to join us Colin and Matt.
Matthew Harrison: I think, Bob, just to touch on another point. If any of your callers do have any questions, we have a great site called VATLive. They can submit any of those questions that they’d like on that site and they usually answer within 24 to 48 hours. We try and provide a great service for answering any additional questions they might have. It’s just our site. It’s called VATLive.
Bob Dunn: Excellent. Perfect. I’m going to include that in the notes and on the post where people can just click and ask you the tons of questions they already have. If anybody’s interested in learning or actually revisiting the differences between sales tax and VAT, I will also have a link to a great article on the Avalara site that gives you a rundown on that. I know that they have several other articles, as well, and as Matt suggested, send them questions.
If you are really struggling with any kind of tax setup or need guidance and support, whether it includes VAT or not, do make a point to check out avalara.com. Their site has a ton of resources. I mean, I’m amazed at it and the services that will cover your tax needs. Since we are heading into the holiday season, our last show this series will be coming to you in January. I’m hoping to actually be recording it live at the Avalara Seattle offices, which should be fun. Until next time, enjoy the holiday season, take care, and we will see you on the next WP eCommerce Show.