Pando

A new European tax is terrible for indie creators -- but startup Gumroad has a solution

By David Holmes , written on February 17, 2015

From The News Desk

On January 1, 2015, a dramatic new change to Europe's tax code took effect; and while it didn't make many headlines in the US tech press, the regulation poses serious legal headaches for indie creators and the platforms that host them.

For years, consumers in the European Union have been required to pay what's known as a Value Added Tax (VAT) on goods and services. Like state taxes in America, the VAT rate differs from one European country to the next. In the past, the tax rate was determined by the location of the seller. For example, if a musician living in Sweden sold a digital download, the VAT was charged at Sweden's rate, regardless of whether the buyer lived in France or the UK. That presented a fairly painless process for musicians who simply applied the same tax rate to every sale they made.

But thanks to the rule change, when merchants sell digital goods like ebooks or downloadable albums the VAT is now determined by the location of the buyer, not the seller. So if the same Swedish musician sells her albums all over Europe, going forward she must charge a different VAT for each country that originates a purchase. What's more, merchants in the US and other non-European Union nations must also calculate and charge the applicable VAT whenever they sell a digital good to a consumer in Europe.

That's no small thing for independent creators. Because no physical address is needed for many digital purchases, the buyer will often provide little more than a email address as identification. Now a seller must not only ask buyers to provide their home country, they must then adjust the price after the fact. It's hard enough for indie creators to convince people to pay for their work. But now if the buyer is one of the 500 million people living in the European Union, there are more obstacles than ever to completing these transactions.

The new regulation was not targeted at smaller merchants, but at huge non-European tech firms like Google and Amazon. Under the old rules, to sell digital goods in Europe these firms merely had to register with one EU member country and use its VAT rate. According to the Guardian, however, big tech companies were accused of funneling payments through Luxembourg, which I'm not even sure is a real country and thus has a super-low VAT.

So when applied to goods sold by large organizations, the new VAT rules make sense, closing a major loophole that had cost EU member states huge amounts of potential revenue every year. But unfortunately, the tax does not discriminate between companies like Amazon that process tens of billions of dollars in annual sales, and a dude in his basement who sells ten albums a year.

The new regulation has been in the works for years. So why is it that, as the clock struck midnight on January 1, virtually none of the major platforms for indie creators -- not Etsy, not Gumroad, not Patreon -- had a system in place to help sellers manage VAT compliance?

"The new rule was suggested over 5 years ago, but it was kind of one of those things where everyone was in disbelief that it would actually happen, because it seemed absurd," said Sahil Lavingia, CEO of Gumroad, a platform that facilitates direct-to-consumer sales for musicians, writers, and other creators. "And then January 1 came around and they were actually serious. Almost everyone was caught off guard."

This sparked widespread outrage among independent communities of artists, who jumped on the hashtag #VATMESS to express their anger over the logistical nightmare they now faced. Suddenly, creators who flocked to platforms like Etsy precisely because they lacked the legal and financial expertise to handle their own ecommerce solutions, were now liable for complying with complex international tax codes.

That was unacceptable to Lavingia.

"[Creators] should basically have to do zero work for VAT," he said. This is in line with his company's entire philosophy: The less artists have to worry about taxes and payments and technological infrastructures, the more they can focus on their craft.

So Lavingia spun his developers off into a mad dash to build out a solution to the VAT fiasco -- a solution that went live last week.

Here's how it works: Going forward, when a purchase is initiated, Gumroad will use various signals to guess a buyer's country-of-residence. It will then ask the buyer to confirm the country before adjusting the price accordingly. The messaging here is crucial: Gumroad, not the creator, will claim to shoulder the blame for any price hike caused by VAT compliance.

"Instead of saying, 'Okay, the creator's now charging $12 instead of $10,'" Lavingia says, "It’s like, 'The creator’s charging $10, Gumroad’s charging $2.' We handle the remittance. We take full responsibility."

So what about the 800-pound gorilla in the indie creator market, Etsy? Last week it pledged to collect VAT from European consumers on behalf of its creators. However, it has not yet built this functionality into its checkout interface. And until it does, we can only assume that the company will remit VAT manually, one consumer at a time, and after each purchase has already been made. Sounds like an inconvenience for buyers and a full-on nightmare for Etsy.

Meanwhile, it appears that Patreon, a direct-to-consumer platform that lets users "subscribe" to creators, is leaving VAT entirely up to its sellers. One of the questions on its FAQ page is, "I live in the European Union. What is VATMOSS and how does it affect me?" Patreon answered by merely linking out to some official government information pages on VAT and recommending that "you consult your professional tax advisor for any additional questions."

Heather Burns, a web designer and Internet Law blogger, writes that this stance renders Patreon effectively off limits for digital creators within Europe.

Those who choose to use it will have to personally query each European patron for their tax status, VAT number, IP address, and/or any of the information required to substantiate the proof of supply. They will be responsible for issuing their own tax invoices to their patrons. They will have to supply the invoice and proof of supply data with their VATMOSS return. They will also, of course, have to store this information in a secure format on an EU-based and data protection compliant server for ten years.

On one hand, I sympathize with Patreon. Europe's new VAT requirements are poorly-implemented and wildly unfair to small-and-medium-sized creators and platforms. But on the other hand, if a platform claims to be truly creator-friendly, it can build a great deal of good will by handling VAT remittance itself. Gumroad does one better by offering a clean software solution that is as frictionless as possible.

"We can say, 'Gumroad is based in the US and how is the EU going to enforce it?'" Lavingia says. "But we have creators all over the world, including in Europe, and if this is a concern for them we should address it."

Complying with lousy laws is a startup's worst nightmare -- companies like Uber sometimes avoid complying with good laws, let alone the lousy ones. But if platforms like Gumroad refuse to create the necessary infrastructure for compliance, it's the creators, not the company, that will pay the price. Furthermore, Lavingia says it's silly to let the pride of the disruptor -- let's call it "The Hubris of Travis" -- prevent him from following the law and doing right by his community.

"The Internet is not exempt from the rules," Lavingia says. "It’s still part of the world we live in. I don’t think we should sort of say, 'Oh whatever the government says, we should do it immediately whatever they say.' But it’s a conversation. There needs to be some friendly pushback... or unfriendly pushback."

[illustration by Hallie Bateman]