Things as certain as Death and Taxes, can be more firmly believ’d.
—Daniel Defoe The Political History of the Devil 1726.
I wrote a brief post in my ravelry group about changes impacting European Union (EU) customers, and I thought I’d further elaborate here. In short, if you reside in the EU and attempt to purchase one of my patterns on ravelry, you will be redirected to LoveKnitting.com to fulfill your purchase. At this time, you will need to create a LoveKnitting account. Your local VAT rate will also be applied to the purchase. Once the purchase is complete, the pattern will appear in your ravelry library. If you do not reside in the EU, there is no change to your user experience at this time.
To explain this decision, and it is my decision, I thought I’d write a possibly long-winded explanation here. Bear in mind, I am not an accountant or an attorney. There have been many posts in ravelry forums, blogs, and twitter on this subject. Unfortunately, many of these posts confuse opinion with fact, and at times, emotions run very high on the subject. All of this is understandable. I have opinions on this topic as well, and will share some of them here. After reading many, many, many posts, I made the decision to use the integration between ravelry and LoveKnitting.
Since most Americans probably don’t know what VAT is, the closest thing that we have in our country is Sales Tax. That really is an oversimplification of the concept, but for the purposes of this post, the comparison will do. Per EU guidelines, on January 1, 2015, purchases of digital goods within the EU are subject to the VAT rate at the buyer’s location. Technically, as a US citizen with no physical presence in Europe, this has been the case for me since 2003, but it hasn’t really been enforced, and I frankly, wasn’t aware of it. This is a change for providers of digital goods located in the EU because prior to this year, these providers charged VAT based on the seller’s location. The other key change is that there is no threshold for cross-border sales. For example, last year, UK providers of digital content who sold less than £81,000 did not have to collect VAT. Now, UK providers need to charge VAT based on the buyer’s location if the buyer is located elsewhere in the EU regardless of total sales.
In my opinion, there are at least two major flaws in this legislation. Both of these flaws serve to stifle creative endeavors that were only made possible because of the internet. This saddens me more than words can express. First, the lack of a threshold places small and micro-businesses at a huge disadvantage. Imagine having to identify the location of the buyer, charge the correct VAT rate (every EU country has their own rate), collect the appropriate data for each transaction, and routinely file these tax returns. It can be a huge administrative burden for any small business. Secondly, the legislation, and my understanding of its interpretation by Her Majesty’s Revenue and Customs (HMRC), do not account for business models built around Software as a Service (SaaS).
The best way that I can describe SaaS is to compare Patternfish to ravelry. My designs are available for purchase on each site; however, the business model of both sites is dramatically different. When a customer purchases a pattern on Patternfish, they are purchasing from Patternfish. Patternfish collects the payment, and pays me a royalty on a periodic basis. This is essentially a wholesale arrangement, and this is not SaaS. Ravelry, on the other hand, provides SaaS. When you purchase a pattern on ravelry, you are purchasing it from me. The payment goes directly to my paypal account, and ravelry doesn’t touch the money. Depending on the volume of my sales, ravelry invoices me for the use of the service.
The reason I point this out is that there is a very vague statement in the legislation about authorization of delivery, which can or cannot be interpreted to mean that sites like ravelry are responsible for collecting VAT. This creates a technical challenge for sites like ravelry because they don’t touch the money. It would require a significant change to the site and their business model to handle all the VAT administration.
In light of this legislation, ravelry partnered with LoveKnitting. LoveKnitting operates in a model similar to Patternfish. Customers who purchase designs from LoveKnitting are purchasing directly from LoveKnitting. LoveKnitting pays designers a royalty based upon sales each month. Since LoveKnitting handles the payment and are located in the UK, they are better positioned to collect and administer VAT. This partnership was the result of concerns raised by many designers, and there was a very real concern that many designers would close up shop if nothing was done.
As someone who works in the IT field, I must say that I’m extremely impressed with ravelry and LoveKnitting’s response to this challenge. Ravelry designers have been provided with options to meet their own needs. We can use LoveKnitting or another site that handles VAT, or we can choose to deal with this ourselves. This solution caters to a wide range of business models and desires. I suspect that customers may experience a few hiccups because these changes were rushed, and I ask that everyone remain patient. This was a big change.
I chose LoveKnitting for two reasons. First, this provides another site where my patterns can be seen and purchased. Most of my sales are on ravelry, but I’m of the mindset that it can’t hurt to be seen elsewhere. Admittedly, EU sales account for a very small portion of my total sales, but who knows what the future holds.
The second reason for my decision is based purely on my own opinion. I doubt that any European authority will invoice me for back taxes and penalties due to noncompliance. I do believe, however, that European tax authorities may try to invoice ravelry for back taxes and possible penalties. I base this opinion on statements that have been attributed to HMRC. I have seen nothing from the U. S. Department of Commerce or the U. S. Department of State to indicate if existing tax treaties are in place to enforce this, which is a bit disconcerting to me. If either department could provide some insight, it could provide some real clarity for U. S. based enterprises. I would caution anyone against relying on statements from their Congressperson, as most members of Congress, in my opinion, are not experts on tax laws or international treaties.
I love ravelry. I wouldn’t be a designer, and I wouldn’t be the knitter that I am without ravelry. I have made friends because of the site, and I will always be grateful to Casey, Jess, and their staff. Choosing the LoveKnitting option is one small thing that I can do to try to protect them from any fallout. I could very well be wrong about this. As I said, this is my opinion. I can assure you, there are plenty of opinions on the subject. I am entitled to mine.
The LoveKnitting integration has been described as a band-aid to buy us all some breathing room while everyone adapts to the legislative change. It is entirely possible that there will be other changes occurring in the next 6 months. I don’t know what these changes will be, and I don’t know what my choices will be when faced with them.
In closing, I’d like to express my sincere appreciation to both ravelry and LoveKnitting. They have implemented some significant changes in the last fews weeks while many of us were enjoying the holidays. They have responded to a torrent of concerns, questions, panic, fear, and sometimes anger with level heads. I’m sure there are bugs, and there may be some very human mistakes that have been made and will be made in the next few weeks. I am grateful, and I hope that our community greets these changes with grace and understanding.