EU VAT response – Smashwords



On January 1, new VAT (Value Added Tax) rules go into effect in the European Union. In the past, the VAT tax, which is deducted from your sales price before your royalty is calculated, was 3%. The low rate was made possible by Smashwords retailers exploiting a loophole in the VAT rules which previously allowed the VAT rate to be based on the geographic location of the retailer’s European headquarters. So retailers located in Luxembourg where VAT was only 3%.

As you may have heard, this loophole closes tomorrow, January 1 2015. Going forward, retailers must deduct VAT tax based on the geographic location of the customer. This means that effective January 1, myriad tax rates will be applied to your ebooks when sold at Smashwords retailers such as Apple iBooks, B&N, Txtr and Kobo.

What Smashwords authors need to do to prepare: Smashwords titles are already compliant with the new tax scheme since Smashwords has always conveyed VAT-Inclusive pricing to our European retailers.

However, although many authors were never concerned about the 3% VAT previously deducted from sales prior to their royalty calculation, most authors will notice the new VAT rates because they average around 20%.

With this in mind, we today launched a new VAT pricing tool that gives you greater control over how we handle your pricing in the countries affected by these new VAT rules.

You have one of two decisions to make today, neither of which are desirable.

1. Choose to do nothing – You can leave your European pricing as it is, and your VAT will continue to be deducted from your regular sales price in each country as it always has been, yet the rate will increase. This means on average, you’ll notice a 17% drop in your per-unit earnings for sales in the UK and Europe. By doing nothing, you’re choosing to bear the burden of the tax rather than passing the tax on to the customer in the form of higher pricing. The advantage of doing nothing is that your prices remain the same, and since some authors and publishers are raising prices, it means your books are actually likely to become more price-competitive if you do nothing.

2. You can choose to use our new VAT Manager tool to pass the VAT burden on to your customers. This will allow you to preserve the same approximate earnings per unit sale that you previously received, but it will also increase the price of your book in each territory. Territories with higher VAT rates will experience a bigger price increase. By passing the VAT burden on to your customer, your books will become more expensive, which means they’ll probably become less desirable to price-conscious customers. Once you opt in to our new VAT Manager tool, all future price changes at Smashwords, as well as all future titles released at Smashwords, will have their prices auto-adjusted to pass the VAT on to customers in the affected countries.

Which decision is right for you? This is your personal decision, but we think the best option is for Smashwords authors and publishers to leave their pricing as it is. It’s not a recommendation we make lightly because your per-unit earnings will drop. It also means that the retailer’s cut, as well as Smashwords’ commission, will also drop correspondingly. As one Smashwords retailer told me, “We’re all getting hit with the same stick here.”

Worth considering: Amazon has announced that it will automatically increase KDP title pricing effective January 1 (the same option we’re making available to you as an opt-in option). They have also announced that after they raise your prices higher, they will price-match your Amazon titles if your titles are available at other stores for a lower price. Since no author enjoys receiving Amazon’s nastygram price match emails, you have an decisions you might make. If you choose to leave your Smashwords prices as they are (i.e., you choose to eat the VAT hit), you can click to your Amazon Dashboard and lower your prices at Amazon to quell Amazon’s price-matching robots. Or, you choose to opt in to the Smashwords VAT Manager tool, we’ll adjust you prices so they approximate Amazon’s new adjusted prices. Your choice.

If you choose to raise your prices in the countries affected by the new European Union VAT scheme, you can do so now. Please carefully read the instructions on that page before making your decision.




December 2, 2014 – (updated) On January 1, new VAT (Value Added Tax) rules go into effect in the European Union.  In the past, retailers were able to locate their European headquarters in Luxembourg, and the VAT imposed on ebooks was based on the VAT rate for the country in which the retailer was based.  In Luxembourg, the VAT was only 3%, a rate that was practically negligible.  Effective with the new EU rules that start January 1, VAT is charged based on the customer’s geographic location.  This means that effective January 1, myriad tax rates will be applied to your ebooks when sold at Smashwords retailers such as Apple iBooks, B&N, Txtr and Kobo.  What Smashwords authors need to do to prepare:  At present, nothing.  Smashwords has always distributed books through our global retailers at a VAT-inclusive price.  This means that VAT for European sales was deducted from the sales price, and only then did the retailer take their cut before sending the remaining proceeds to Smashwords.  With the new VAT rules, the VAT tax will range from 15% to 25%.  The average across all the countries is 20%.  The UK, a large market for ebooks, is 20%, even though the VAT rate for printed books is 0% (yes, ZERO).  As one Smashwords retailer told me recently, “we’re all getting hit with the same stick.”  It’s a painful stick.  Authors and publishers are left with a difficult decision.  Raise prices on consumers to make up for the tax bite, or eat the higher taxes to preserve low prices?  The VAT change comes at a time when, as I wrote recently in a post at the Smashwords blog, the ebook market is facing slower growth and many indies are facing increased competition and lower sales.  And here’s something I haven’t heard anyone talk about:  This VAT change also comes at a time when the US dollar is reaching multi-year highs in the currency markets.  Since Smashwords books are originally priced in dollars before we calculate currency conversion rates, it means that dollar-denominated books have already been getting more expensive to European customers since their Pounds and Euros don’t stretch as far as they once did.  If you’re contemplating holding the line on your prices, you can take some solace that the strong dollar will mitigate some of your pain.  Long term, however, indies will be forced to make that difficult decision:  eat it or pass it on to reader?  We’re not contemplating any immediate changes at the Smashwords retail store, though we’re investigating options and obligations.  For the time being at least, your highest margins will be at the Smashwords store.