The emotions for those who've been talking about the European Union's (EU) VAT (Value Added tax) changes that went into effect on January 1, 2015, have ranged from rage and depression to shock and confusion to out and out denial. Who does the EU think they are anyway to suddenly make demands on non-European countries that are ridiculous at best and scary at worst!

When I first heard it I could not understand how the EU has any jurisdiction over businesses who are not citizens of or have a presence in the EU. However, the EU is a form of government and as such they can say, “abide by our rules, collect and pay the tax or don't sell your digital products to our people.” And the US has agreed in several treaties to back them up. In a much simpler comparison it is like collecting and paying a tax to a different state because you sold your product at an event in their state. If you don't want to collect and pay the tax, don't sell your product to that state's people at the event on their turf.

Many are suggesting that you do just that: refuse to sell your digital products to anyone in the EU. I foresee that this will open an entirely different can of worms however, as it has already been alluded to that refusing sales to EU countries could open the doors for legislation for “country profiling” and “discrimination”.

Disclaimer:

Before we go further, I want to be sure you understand that I am not a legal expert. I am not a tax expert, and nothing that you read in this blog post or on this site is to be taken as legal or tax advice. By continuing to read this post you agree that I will not be held liable for any actions you take in regards to information you may find here.

That being said, I AM a small business owner whose goal is to help other small business owners and the potential effects of this tax, silly though it may be, are huge for you and I and must be understood and reckoned with.

God does not call us to be ignorant and dumb. He advocates that we abide by the rules under which we are governed and that we do so honestly. So first, the understanding:

Who is affected by the VAT tax?

A quick summary: As of January 1, 2015, the VAT tax applies to anyone who sells digital products to consumers/customers whose residence lies within the 28 countries of the European Union (EU). The duty of confirming the customer's residence  location, collecting the appropriate tax according to his location, safeguarding his personal information and the details of the transaction, and reporting and paying those taxes quarterly to the correct countries lies completely with the seller (you).

What is to be taxed and what is not to be taxed?

It should be noted that that the compliance for payment of the VAT applies only to an “e-service” product. Here is how HM Revenue and Customs (HMRC) explained when questioned by MyNewsDesk on a Twitter Q and A November 27, 2015:

What constitutes an e-service? #VATMOSS

An e-service is one that is fully automated and involves no or minimal human intervention. #VATMOSS

What is meant by “no human intervention”?

This is where the sale of the digital content is entirely automatic – for example a customer clicks the “Buy Now” button on website and

the content downloads onto the customer’s device, or
customer receives automated e-mail containing content.
In both cases these would constitute an e-service.

What is “minimal human intervention”?

This is where the sale of the digital content is mostly automatic but the small amount of manual process involved does not change the nature of the supply from an e-service – for example a customer clicks “Buy Now” button on website and

vendor receives notification and clicks a button, which produces an email pre-populated with the customer’s details and containing content which is sent to the customer; or
vendor receives notification and clicks a button which produces an e mail pre-populated with the customer’s details. Vendor attaches content and sends customer e-mail by clicking “Send”
In both cases these would constitute an e-service

When does the “human intervention” exceed “minimal”

This is where the amount of manual process involved in the sale means that the service ceases to be an e-service. In these cases the website functions as a “shop window” for the sale rather than also providing the mechanism by which the sale is made – for example

a customer clicks “Buy Now” button on website and is added to a list. At end of day the vendor takes list, manually completes an e-mail with each customer’s details, attaches the relevant content and hits “Send”; or
a customer emails vendor with details of the products they wish to purchase. Vendor manually replies to email and attaches the content.

So How Do I Avoid the VAT?

As you can imagine, depending on your location as a small business, and the countries where your customers are, this is a potential administrative nightmare. The tax itself is not a big deal, just a long process: you figure out where the customer is from, and what the tax rate for his country is and add the tax price to your product price and the consumer pays it. It's just cost of living going up, right?

For most small bloggers and online businesses, however, the problem is that the time and expense of tracking, paying, and keeping information safe (for 10 years!!!) to be compliant with VAT is far more expensive than the total income from product sales in those countries merits. In effect you would be loosing money. From a financial standpoint, compliance is simply not a wise business decision. So what do you do if this is the case for you? If you cannot comply, how can you avoid the VAT honestly?

I believe you 4 options:

If you sell digital products on your blog or website, you HAVE to make a decision. Chris Lema of  Chrislema.com says that he will be moving all of his product sales to a third party platform to avoid having to deal with VAT. Tabitha Philen of Inspired Bloggers Network believes that the only option is to block sales to EU countries.

I believe you have four options to avoid VAT honestly, and I'll outline them here along with their pros and cons, as I see them.

Option 1.

Stop selling digital products (e-services) on your own site and use a third party such as Amazon, Udemy, or Etsy who are already complying for sales processed through their platforms.

• Pro – You will not have the headache and extra work because you do not process the payment yourself. The platform would add the tax to the price, remit the tax to the correct country, keep the records etc.
• Con – You may not make as much from each sale. Example: An ebook sold on your site for $7.99 gives you $7.59. An ebook sold on Amazon for $7.99 gives you only $3.49, and you had to pay someone $75 or more to format it for kindle for you!
• Con – People may follow your link to the third party site and get distracted and never follow through with the purchase of your product.
• Con – Lower revenue streams means you must A. produce twice as many products to make the same amount and continue to grow your business at the same rate. or B. Take twice as long to grow your business because your revenue streams have been cut in half.

Option 2.

Block EU countries from making purchases of digital products (e-services) on your site altogether (most e-commerce plugins such as WooCommerce and WP estore do or will soon offer this option)

• Pro – If you don't sell to EU people, you don't have to pay the EU VAT tax.
• Pro – It is fairly simple to make your ecommerce system function this way through the plugins and extensions.
• Con – You risk loosing followers of your brand, customers who would advertise for you, and $ in your bank account.
• Con – You risk legislation for discrimination.

Option 3.

Block EU countries from making automated purchases of digital products, but allow them to request “human intervention” to place their order.

• Pro – The human intervention of you typing in their info, data, manually sending an invoice, manually sending the product, according to HMRC definitions exempts it from the “e-service” category and therefore from the VAT tax.
• Con – You have worked hard to make everything automated. It's all about passive income right? So now you have to either do more of the work yourself or pay someone to manually do what was automated before.
• Con – Your customers may become frustrated because of the time involved to manually process orders.
• Con – the burden of proof still rests upon you to PROVE that this sale to an EU customer was not an “e-service” IF  you are ever audited.

Option 4.

Be sure each product you sell includes a human intervention aspect that applies to all customers regardless of residence or IP address.

• Pro – your products are no longer classified as an “e-service” because they all contain significant human intervention, and therefore you are exempt from the VAT tax nightmare.
• Pro – there is no risk of discriminatory accusations.
• Pro – your customer receives personal communication as a result of the human interaction, a potential plus for loyalty and relationship building with your customers. Like in the “olden days” when everyone knew everyone they bought good from by their first names.
• Con – You have worked hard to make everything automated. It's all about passive income right? So now you have to either do more of the work myself or pay someone to manually do what was automated before.
• Con – Your customers may become frustrated because of the time involved to manually process orders.
• Con – the burden of proof still rests upon you to PROVE that this was not an “e-service” IF you ever audited.

In my opinion, though options 3 and 4 have the greatest number of Cons (and there may be more), when your choices are bad vs. worse, 3 and 4 seem to be the best options for small bloggers and businesses to avoid the VAT.

You HAVE to make a choice. How will your business respond? Your comments are welcome below.

More Information:

MyNewsDesk on a Twitter Q and A with HMRC November 27, 2015 – you should read this for yourself!

Chris Lema – My Site Will Be Changing

Inspired Bloggers Network – What Does VAT Mean for US Bloggers? – lots of links to more info.

Video: Star Khechara interviews multinational accountant Lisa Marie Robinson on VAT tax implications – very good!