Amazon and VAT

Euro_coins_and_banknotesAmericans who publish their books with KDP received an email earlier this month about VAT and how it impacts the prices of their books. If you were a lucky recipient of that email, you might have spent a split second wondering what it was about, just before your eyes glazed over.

VAT is the abbreviation for Value-Added Tax. It’s sort of the same as our sales tax here in the U.S., and sort of not. For the purchaser, it’s more or less a national sales tax. However, for sellers, it’s a tax on whatever they added to the product (or material or service) by what they did to get it in shape to sell. Here’s how Wikipedia explains it:

“The value added to a product by or with a business is the sale price charged to its customer, minus the cost of materials and other taxable inputs. A VAT is like a sales tax in that ultimately only the end consumer is taxed. It differs from the sales tax in that, with the latter, the tax is collected and remitted to the government only once, at the point of purchase by the end consumer. With the VAT, collections, remittances to the government, and credits for taxes already paid occur each time a business in the supply chain purchases products.”

Your eyes just glazed over again, didn’t they? Sorry. Let’s try it again, and in English this time.

Say you assemble widgets and sell them to widget consumers. The government wants its pound of flesh from you, right? So it’s going to levy a tax on you for making those widgets. But your widgets are assembled from components, which in turn are made from raw materials. The component manufacturer pays VAT on the raw materials. It then charges you VAT for the finished components, but it gets credit with the government for the VAT it paid on the raw materials. And when a consumer buys your widget, you charge them the full VAT, but what you owe the government is full VAT minus the VAT you paid the component maker.

The only person who has to pay the full VAT, then, is the end user – otherwise known as the consumer.

(I suspect this is a gross oversimplification. If I’ve misunderstood the process, please let us know in the comments.)

Amazon sent that email because on January 1st, 2015, the European Union’s rules are changing for digital products and services. Previously, VAT was calculated based on the country of the supplier/seller. From January 1st on, VAT will be figured based on the buyer’s country. In other words, U.S. suppliers now have to figure VAT into their prices when they sell to buyers who live in the E.U. Wikipedia has a list of VAT countries and rates here.

The good news is that, for titles already enrolled in KDP, Amazon will make the initial adjustment for us. The bad news is that prices on books from U.S. publishers will increase automatically to cover the VAT. If you like to tinker with your prices so that they don’t end in a weird number of cents, you can still do that, but the new price will be figured with VAT included.

KDP is also changing its minimum and maximum E.U. prices for 35% and 70% royalties so that they include VAT going forward. And yes, if your book’s new price + VAT doesn’t meet the minimum price for your royalty rate, Amazon will fix it for you this one time. Here’s a list of the new minimum and maximum KDP royalty prices.

Bottom line? Don’t sweat the VAT. Amazon’s going to do the math for you.

Author: Lynne Cantwell

Lynne Cantwell grew up on the shores of Lake Michigan. She worked as a broadcast journalist for many years; she has written for CNN, the late lamented Mutual/NBC Radio News, and a bunch of radio and TV news outlets you have probably never heard of, including a defunct wire service called Zapnews. But she began as a fantasy writer (in the second grade), and is back at it today. She currently lives near Washington, DC. Learn more about Lynne at her blog and at her Amazon author page.

22 thoughts on “Amazon and VAT”

  1. Thank you Lynne for the explanation on VAT. I always wondered about that.
    Whichever way the VAT tax is applied we’re all subject to multiple taxation no matter what. When you collect you paycheck you pay income tax to Uncle Sam. Afterwards, on whatever is left of that paycheck you then pay property tax, sales tax, city tax, county tax, and let’s not forget utilities fees padded onto the bill that goes to pay taxes etc,. But then, that’s the price we pay for freedom. No?

  2. Thanks for the info, Lynn. The link to the KDP chart was helpful, though I’m still very lost on VAT. Sounds like our books will cost more to European consumers, but sounds like books by Europeans used to cost more (as the VAT was based on the seller’s country of origin, not the buyer’s). So, does this just level the playing field so all books sold in Europe (whether by Europeans or not) get the VAT?

    1. That’s the theory, RJ. It’s kind of like the sales tax loophole in the US where online sellers don’t have to charge sales tax (in some instances) when the buyer is in a different state than they are. (Technically, most states require you to self report and pay the sales tax yourself, called use tax instead, but no one does except big ticket items like cars which they actually have a way to enforce.)

      Of course the theory (to level the playing field) may or may not work out that way. Imagine that you sell books directly from your website. You’re all setup to charge sales tax to buyers from your state at the rate effective where you live. What that rate is for you depends on your state sales tax and possibly additional percents (or fractions) for your county, city, and potentially other government subdivisions. This is relatively simple.

      Now imagine they passed this same law in the US. To continue selling books from your website you’d need to charge everyone sales tax (still no big deal), but you’d have to do it based on the rate where the buyer lives. Presumably you’d also need to have a sales tax license in every state and make 50 (or 51 with DC) payments each quarter, etc. In the US it would be a nightmare and not practical without some major help (either from a service or software vendor of some kind). Even for fairly large businesses, it would be a non-trivial exercise and expense. At least in Europe there are less subdivisions with their own rates (30 something European countries rather than thousands of different combinations in the US) and I believe only one place to send the money instead of 50.

      1. States are trying to figure out a way to enforce sales tax collections on any sort of e-commerce purchases. Virginia requires e-commerce companies to charge sales tax on purchases by Virginia residents if the company has a physical presence in the state. So Amazon now charges me sales tax on stuff I order from them. (Although not on ebooks. But I’m sure that’s just a matter of time.)

  3. Blurgh. Then there is the 30% they keep from us here, too. I can’t wrap my head around it all. Since my books have been there a while I’ll wait and see what they do to them. I hope it doesn’t affect our .99 specials.

    1. I think the bottom rate for the 35 percent royalty will now be 99 cents/pence — the same as it has been in the US. Previously, it was 77 cents/pence or something like that.

  4. Well done. I think it is good to point out that ALL taxes are paid by the consumer. Whether they are corporate taxes, employment taxes, or capital gains taxes, in the end the consumer is the one that pays for all the taxes collected by the government.

  5. I think you nailed VAT. Of course, it is massively inefficient with multiple collection stages and all the administration for companies and taxation departments that governments love, so will never raise the net income expected. We’ve lived with it for years in Europe.

    Some years ago there was an attempt to make US suppliers collect VAT, and the responses were:-
    a) we’ll no longer sell to European customers
    b) we refuse to collect tax for a foreign government, or
    c) we’ll ignore it

    But for Amazon, Europe is such a big market, I guess they can’t get out of this one.

  6. Thanks Lynne, I lived with VAT in the UK for years, when they introduced it as a 10% constant; by the time I left the UK it was 17% (I understand it’s 20% now). When I arrived here in Australia it was none existent and the general populous managed to resist it for a long time (about 20 years) but they eventually squeezed it through as GST (general services tax) in 1999, supposedly to replace a number of taxes but, surprise surprise, it was just another add-on tax. The division of said GST is still a bone of contention between state and federal governments (who gets how much et cetera) but at least it’s still 10%, for the moment (every time government hints at increasing it there is almost a national uprising).

    Excellent post Lynne.

    1. Lucky you, TD! A mere 10% across the Ditch. GST (Goods and Services tax) in NZ came in at 10%, hiked to 12% and is now 15%, causing significant inflation when applied to petrol and other pricey items. And they wonder why we buy stuff online to avoid it!

    2. Good points made on the tax rate. A book now priced at £1 in the UK will have to be sold at £1.20 to bring in the same income to you. If it sells at £1, the income (before Amazon’s share) is £0.83.

      So that’s a big bite out of income on European sales.

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