The mysteries of taxes: How to handle VAT as an EU based merchant?

[Eve Light]

Hi everybody, I hope you can help me on this one. I've been a creator on SL for quite some years now and it looks like I'm getting into trouble with my tax department (I'm living in Germany). They asked me to declare VAT and reach in a sales tax return. As far as I understood, there is no VAT on transactions between residents http://wiki.secondlife.com/wiki/Value_Added_Tax , so I never really worried about it. But after weeks of research and paying 3(!) absolutely clueless tax accountants for even more research, it doesn't seem so easy. So my questions are:

Does anyone of you European or - even better - German merchants pay VAT for sales in L$?

And if so, how do you declare it?

Since VAT would apply to each sale, I'd have to pay the VAT not only on my final income (the amount I withdraw), but also on all the money I spend for advertising, hiring people for customer support, modeling for vendor pics, and so on, ...right?

And how do you calculate the value of each L$? What do you use as receipts?

OR: If LL would be right and there's simply no VAT to pay on L$ transactions, what do I write into the sales tax return? Could I say my business partner is LL, a US based company, since the only transactions in "real" money are the transactions between LL and me?

Thank you so much in advance!

Edited May 26, 2021 by Eve Light

[Polenth Yue]

Tax people argue back and forth about whether transactions in L$ should be taxed, so I doubt you'll find a firm answer. In general though, people only usually get taxed on what they cash out. There isn't currently a practical way to impose any other kind of tax. If you're up for some reading, this article discusses some of the issues in a US context: https://digitalcommons.law.yale.edu/cgi/viewcontent.cgi?&article=1114&context=yjolt

In the UK, this means that I'd only record earnings if I cashed out. It'd be a line in my accounts with the value I cashed out and that it's from Second Life art sales.

The other issue is the taxation treaty between your country and the US... you will have to fill out a form and that will state whether LL has to withhold any money for US taxes or not. The rate is 0% between the US and UK, so nothing would be withheld in my case.

[Eve Light]

1 hour ago, Polenth Yue said:

https://digitalcommons.law.yale.edu/cgi/viewcontent.cgi?&article=1114&context=yjolt

In the UK, this means that I'd only record earnings if I cashed out. It'd be a line in my accounts with the value I cashed out and that it's from Second Life art sales.

The other issue is the taxation treaty between your country and the US... you will have to fill out a form and that will state whether LL has to withhold any money for US taxes or not. The rate is 0% between the US and UK, so nothing would be withheld in my case.

Cool, thanks for the link, I'll read into that! So it means you paid VAT on what you cashed out? (at least before Brexit...) And did you do the calculation based on Tilia receipts? Wouldn't that be a transaction between a US company (LL) and you, which would simply mean you wouldn't have to pay the VAT at all?

I've been paying income taxes for years already, but now I crossed a limit (17.500€) and seemingly would have to pay VAT as well. As I understand it, I'd have to take VAT from my European customers and forward it to the tax department, but since we can't know who is European or who has a business and so on, they just want us to pay VAT on everything, even without proper receipts?

Sorry for the confusion, but this is all crazy...

Edited May 26, 2021 by Eve Light

[Rowan Amore]

8 hours ago, Eve Light said:

Hi everybody, I hope you can help me on this one. I've been a creator on SL for quite some years now and it seems I'm getting into trouble with my tax department (I'm living in Germany). They asked me to declare VAT and reach in a sales tax return. As far as I understood there is no VAT on transactions between residents http://wiki.secondlife.com/wiki/Value_Added_Tax so I never really worried about it. But after weeks of research and paying 3(!) absolutely clueless tax accountants for even more research, it looks quite more difficult. So my questions are:

Does anyone of you European or even German merchants pay VAT for sales in L$?

And if so, how do you declare it?

Since VAT would apply to each sale, I'd have to pay the VAT not only on my income, but also on all the money I spend for advertising, hiring people for customer support, modeling for vendor pics, and so on...?

And how do you calculate the value of each L$? What do you use as receipts?

OR: If LL would be right and there's simply no VAT to pay on L$ transactions, what do I write into the sales tax return?

Thank you so much in advance!

VAT would only be applied to buying and selling Lindens as those are the only transaction involving RL monies.  Lindens, in and of themselves, have no value so in essence, inworld transactions are tokens being traded for a product.  

[Polenth Yue]

11 hours ago, Eve Light said:

Cool, thanks for the link, I'll read into that! So it means you paid VAT on what you cashed out? (at least before Brexit...) And did you do the calculation based on Tilia receipts? Wouldn't that be a transaction between a US company (LL) and you, which would simply mean you wouldn't have to pay the VAT at all?

I've been paying income taxes for years already, but now I crossed a limit (17.500€) and seemingly would have to pay VAT as well. As I understand it, I'd have to take VAT from my European customers and forward it to the tax department, but since we can't know who is European or who has a business and so on, they just want us to pay VAT on everything, even without proper receipts?

I'm not responsible for any VAT that LL has to charge me. It's on LL to add it to the price if needed. I wouldn't charge VAT to customers in Second Life as it's L$. The main issue is whether L$ is a real currency. Generally, it has been treated as not being one. This is the stance taken by LL and Tilia (L$ are "virtual tokens" not money). Even if you want to charge VAT, there's no system for you to do that. Which is how you know that nobody else is doing it.

[Nova Convair]

Sales in SL are ingame activities with no money involved.

If you cash out - that's income and subject to income tax.

Buying L$? You have no real proof that its part of your business but you can try, may or may not work.

and if you think about ingame activities:

Do you have bills with sales tax? No? Do you even have customers? I mean people not some phantasy ingame names. No? Can you even proff that you have delivered something - besides screenshots? Can you proof anything?

Ingame you definitely have no business from the viepoint of the tax authorities. 😎

[Eve Light]

2 hours ago, Nova Convair said:

Sales in SL are ingame activities with no money involved.

If you cash out - that's income and subject to income tax.

Buying L$? You have no real proof that its part of your business but you can try, may or may not work.

and if you think about ingame activities:

Do you have bills with sales tax? No? Do you even have customers? I mean people not some phantasy ingame names. No? Can you even proff that you have delivered something - besides screenshots? Can you proof anything?

Ingame you definitely have no business from the viepoint of the tax authorities. 😎

Exactly! But the problem is they want me to do a sales tax return - so how do I declare this?

[Rowan Amore]

3 minutes ago, Eve Light said:

Exactly! But the problem is they want me to do a sales tax return - so how do I declare this?

What are the items for which Linden Lab charges VAT or GST?

Most services that you pay Linden Lab directly for have VAT or GST applied. This includes:

Monthly & Quarterly Premium membership fees

Purchases from the Land Store

Mainland Land use fees (tier)

Private Region maintenance fees

Land auctions

LindeX transaction fees

 

 

 

How can I tell what items had VAT or GST charged?

Your Account History in your Dashboard displays:

Each transaction you've made

Whether VAT or GST was applied

The rate at which VAT or GST was applied

The amount of VAT or GST charged for each transaction

 

This has nothing to do with inworld sales.

[Eve Light]

6 hours ago, Rowan Amore said:

What are the items for which Linden Lab charges VAT or GST?

Most services that you pay Linden Lab directly for have VAT or GST applied. This includes:

Monthly & Quarterly Premium membership fees

Purchases from the Land Store

Mainland Land use fees (tier)

Private Region maintenance fees

Land auctions

LindeX transaction fees

 

 

 

How can I tell what items had VAT or GST charged?

Your Account History in your Dashboard displays:

Each transaction you've made

Whether VAT or GST was applied

The rate at which VAT or GST was applied

The amount of VAT or GST charged for each transaction

 

This has nothing to do with inworld sales.

Right. But how do I declare the money I‘ve cashed out? Do I say it‘s non-taxable money I‘ve received from a US based company? Because if I say that it‘s from art sales (which I did in my income tax returns), I‘d clearly have to pay VAT on it.

[Mollymews]

1 minute ago, Eve Light said:

Right. But how do I declare the money I‘ve cashed out? Do I say it‘s non-taxable money I‘ve received from a US based company? Because if I say that it‘s from art sales (which I did in my income tax returns), I‘d clearly have to pay VAT on it.

is best to talk to a RL tax accountant in your country who has knowledge of the tax laws as they apply in your country. The tax requirements re. online and in-game transactions do differ by country/jurisdiction (incl. the different countries within the EU)

[Rowan Amore]

It isnt considered sales tax on items sold in SL.  You are not paying tax on art sales (if that's what you are selling in SL).  You are paying VAT tax on the items listed above.  Linden purchases, linden sales, premium membership, tier.  Sales between you and residents are not taxed.  It's transactions between you and Linden Lab that are taxed.

Edited May 27, 2021 by Rowan Amore

[Eve Light]

36 minutes ago, Mollymews said:

is best to talk to a RL tax accountant in your country who has knowledge of the tax laws as they apply in your country. The tax requirements re. online and in-game transactions do differ by country/jurisdiction (incl. the different countries within the EU)

As I said I've been discussing this with 3 different tax accountants already and paid them way more than my yearly income tax. They do not know how to do it. I usually pay their research, which usually results in no clear answer. The last thing they said is I would have to track each L$ transaction, calculate what the L$ would be worth in the moment I receive them from my customers and charge/pay VAT on it. I believe that this is kind of impossible to do, so I thought I ask here. Is there nobody who has run into the same issue? Could it really be that I am the first European merchant who is struggeling with VAT? I'd also be super happy if anyone could recommend a tax accountant!

Edited May 27, 2021 by Eve Light

[Eve Light]

47 minutes ago, Rowan Amore said:

It isnt considered sales tax on items sold in SL.  You are not paying tax on art sales (if that's what you are selling in SL).  You are paying VAT tax on the items listed above.  Linden purchases, linden sales, premium membership, tier.  Sales between you and residents are not taxed.  It's transactions between you and Linden Lab that are taxed.

I know. But I can't have an income of over 17.500€ without charging/paying VAT on it - unless my business partner is a foreign, non-EU company. But LL clearly state in the TOS, that we are not working for them. I think my former tax accountants see it as a form of platform economy - similar to selling stuff on Ebay - and I guess LL sees it the same way, right?

Oh and is it possible, that "There is no VAT for Resident <-> Resident transactions." just means that LL is not taking care of those taxes for us, but maybe we still have to charge/pay VAT on L$ transactions?

Edited May 27, 2021 by Eve Light

[Eve Light]

10 hours ago, Polenth Yue said:

I'm not responsible for any VAT that LL has to charge me. It's on LL to add it to the price if needed. I wouldn't charge VAT to customers in Second Life as it's L$. The main issue is whether L$ is a real currency. Generally, it has been treated as not being one. This is the stance taken by LL and Tilia (L$ are "virtual tokens" not money). Even if you want to charge VAT, there's no system for you to do that. Which is how you know that nobody else is doing it.

If I charged VAT is one question, but if I have to pay it is another. I couldn't charge VAT, because my products would be much more expensive than my competitor's - but I could return VAT as some kind of discount, if US customers or those who run businesses would reveal their identities...theoretically lol

Nah, sounds like a crazy idea. But it might be, that I simply have to pay VAT, regardless of being able to charge it..?

Edited May 27, 2021 by Eve Light

[Alwin Alcott]

it's a complicated situation.  I seriously doubt your sales are target of VAT because the L$ have no value.
As dutchie, i only have to give my  outcome from L$ sales as income.

Don't contact tax accountants, they only have experience in their own workfield, (rarely digital ! .. at most online sales, and SL is nó webshop for rl goods) contact your tax office directly, if needed make a appointmen with the local ( or area) representative. If you get the outcome of that on paper, you'll always have the official statement how to do it. With accountants you'r still unsure how the state will take it.

[Eve Light]

2 minutes ago, Alwin Alcott said:

Don't contact tax accountants, they only have experience in their own workfield, (rarely digital ! .. at most online sales, and SL is nó webshop for rl goods) contact your tax office directly, if needed make a appointmen with the local ( or area) representative. If you get the outcome of that on paper, you'll always have the official statement how to do it. With accountants you'r still unsure how the state will take it.

Your'e right and I already kind of tried that. Due to covid it wasn't a personal meeting though, but I sent a long letter in which I explained precisely what I do and the way the money goes from L$ to €. All they sent back was a letter that said "Please find out how VAT is applied and do the sales tax return" 😄

[Polenth Yue]

28 minutes ago, Eve Light said:

I know. But I can't have an income of over 17.500€ without charging/paying VAT on it - unless my business partner is a foreign, non-EU company. But LL clearly state in the TOS, that we are not working for them. I think my former tax accountants see it as a form of platform economy - like if I would sell stuff on Ebay - and I guess LL sees it the same way, right?

It isn't like Ebay. It's more like selling books on Amazon. I'm not being paid for the books directly by customers. Amazon is paid, delivers the book, and then puts royalties in a balance. Once they decide it's really my money, they pay me the balance. So Amazon handles VAT from customers where needed. If I was required to pay VAT on the royalties, it would be on that payment from Amazon.

Try asking the VAT experts how they handle royalties from a US company. That might give you a more useful answer.

[Eve Light]

54 minutes ago, Polenth Yue said:

Try asking the VAT experts how they handle royalties from a US company. That might give you a more useful answer.

Thank you, that's a good hint. I googled it in German and it seems like if I sell the royalties to a US company (if LL is my "payment debtor"), there will be no VAT charged, because they are a company and clearly based outside of the EU. But if the "payment debtors" would be users, I would have to pay (and charge) VAT, because the "downloads" are anonymous and the user could be in the EU. I'd say LL is my "payment debtor", but why did the tax accountants struggle with this - although I showed them my Tilia receipts and the money on my bank account clearly came from Tilia/Linden Lab, which clearly is a company?

[Polenth Yue]

11 hours ago, Eve Light said:

I'd say LL is my "payment debtor", but why did the tax accountants struggle with this - although I showed them my Tilia receipts and the money on my bank account clearly came from Tilia/Linden Lab, which clearly is a company?

In my experience, money people rarely understand how online earning works and have no idea how to do accounts for it or tax it. Often what you've sold is rights to sell/distribute your work, but you'll get advice as though you own a grocery shop.

[Finite]

11 hours ago, Eve Light said:

Thank you, that's a good hint. I googled it in German and it seems like if I sell the royalties to a US company (if LL is my "payment debtor"), there will be no VAT charged, because they are a company and clearly based outside of the EU. But if the "payment debtors" would be users, I would have to pay (and charge) VAT, because the "downloads" are anonymous and the user could be in the EU. I'd say LL is my "payment debtor", but why did the tax accountants struggle with this - although I showed them my Tilia receipts and the money on my bank account clearly came from Tilia/Linden Lab, which clearly is a company?

You would only need to concern yourself with it if your country taxes income. If they do, the only number you need to report is the total $value of what lindens you converted to actual money. Since that is considered income. If it stays as lindens it doesn't count as anything, at least currently.

[Eve Light]

15 hours ago, Finite said:

You would only need to concern yourself with it if your country taxes income. If they do, the only number you need to report is the total $value of what lindens you converted to actual money. Since that is considered income. If it stays as lindens it doesn't count as anything, at least currently.

Hi Finite, this is not about income tax (I've been paying that for years already), but about VAT, which is an additional tax, that EU residents are being charged. For those of you, who are looking for information on how to handle VAT - here is an interesting thread in another forum with a lot of information, but it's in German: https://www.slinfo.de/threads/umsatzsteuer-auf-verkäufe-von-objekten-bzw-l-transaktionen.44446/

Currently it looks like we have to pay (and theoretically charge our customers) additional VAT. There have been court proceedings in Germany in 2019 and the result was that L$ are considered to have a real value and therefore we would have to pay VAT on transactions between residents - in contrary to what most people believe and what LL state on their website. But there are currently proceedings on appeal on questions of law on this decision and we should have a final answer in 2021.

Edited May 28, 2021 by Eve Light

[Finite]

1 hour ago, Eve Light said:

Hi Finite, this is not about income tax (I've been paying that for years already), but about VAT, which is an additional tax, that EU residents are being charged. For those of you, who are looking for information on how to handle VAT - here is an interesting thread in another forum with a lot of information, but it's in German: https://www.slinfo.de/threads/umsatzsteuer-auf-verkäufe-von-objekten-bzw-l-transaktionen.44446/

Currently it looks like we have to pay (and theorethically charge our customers) additional VAT. There have been court proceedings in Germany in 2019 and the result was that L$ are considered to have a real value and therefore we would have to pay VAT on transactions between residents - in contrary what most people believe and what LL state on their website. But there are currently proceedings on appeal on questions of law on this decision and we should have a final answer in 2021.

Aw thanks sorry I misunderstood. Ya that's pretty lame.

[Eve Light]

15 hours ago, Polenth Yue said:

In my experience, money people rarely understand how online earning works and have no idea how to do accounts for it or tax it. Often what you've sold is rights to sell/distribute your work, but you'll get advice as though you own a grocery shop.

Absolutely! I've explained the same things over and over and over again, with screenshots, with examples, in very slow and short sentences... It drives you nuts. But we're talking about thousands of $/€ or possibly even punishments for tax evasion, so it's really important that we get to the ground of this.

Edited May 28, 2021 by Eve Light

[OptimoMaximo]

On 5/27/2021 at 7:13 AM, Eve Light said:

The last thing they said is I would have to track each L$ transaction, calculate what the L$ would be worth in the moment I receive them from my customers and charge/pay VAT on it. I believe that this is kind of impossible to do, so I thought I ask here. Is there nobody who has run into the same issue? Could it really be that I am the first European merchant who is struggeling with VAT?

What I do is get the tax calculated as technical or artistry consulting job, so no sales based VAT can be applied. Basically I'm a free professional that occasionally or on a steady basis works (and gets paid) for their services to the overseas company. This way I saved myself a lot of headaches. This works in Italy though, you should see if that can be applied in Germany too