19 January 2017 | 59 Comments
Over 3 years ago, we introduced the idea (and the logo you see on many Kickstarter campaigns) of projects being “EU friendly.” I’m going to focus on the EU region today–specifically in terms of VAT–but you could feasibly replace the word “EU” with other regions and this information will still apply.
Before I begin, I need to emphasize that I am not an accountant or a tax expert by any means. Far from it. I’ve fulfilled 7 EU-friendly Kickstarter projects and I’ve talked extensively to various creators and accountants about VAT, but this is still second-hand information. Also, this information is subject to change over time, so if you see something here that is inaccurate or outdated, please comment so I can fix it.
What Is EU-Friendly Shipping?
A reward must meet one of the following qualifiers if it is to be called “EU friendly”:
- The total amount paid for the reward by a backer (including shipping) must by less than 22 Euros. If that is the case, it doesn’t matter where it’s shipped from. [Update: The €22 amount may vary by country. See comments by Nicolai and Nick.]
- The reward is freight shipped to a fulfillment center in Europe and fulfilled to European backers from there. If that is the case, the reward price doesn’t matter.
Why Does “Friendly” Shipping Matter?
“Friendly” shipping matters because if it’s not a possibility, the cost to the backer can be significant. Say that someone in the EU backs a $40 reward and pays $30 in shipping from the US to the EU (we’ll assume that the reward includes a built-in shipping subsidy of $10 so that the creator can say that there’s “free” US shipping). Legally, the declared value must be the reward price plus shipping.
When the courier delivers the package to the backer, the backer must pay VAT (~21%, depending on the country). So a $40 reward could end up costing the backer nearly $85. Sometimes there’s even an administrative fee on top of that.
With EU-friendly shipping, the shipping fee is lower in the first place and the creator pays for VAT when the goods enter the country. These two factors allow for a significantly lower price to European backers.
What Is “VAT”?
VAT stands for “value-added tax.” Specifically, for Kickstarter creators accepting pledges from European backers, it refers to an approximate 21% tax.
How Is VAT Calculated and Who Pays It?
If the creator ships the rewards in bulk to a fulfillment center in Europe, they will pay VAT on the declared value (reward and freight shipping cost) at port.
So if I have a $40 reward that costs $20 to ship from Gamesquest in the UK to Germany, accounting for a built-in shipping subsidy of $10, a German backer would pledge $50. Say that reward costs $2 to freight ship from my manufacturer to the UK. That puts the declared value at $52. With a 21% VAT, I would pay $10.92 when the reward enters the EU.
As Doug notes in the comments, some products (like books) interact differently with VAT and duties.
How will this change when the UK is no longer in the EU?
I have no idea. I’m guessing that the UK will have its own VAT, so creators will pay VAT twice if they use a fulfillment center in the UK to send to backers in the EU. If that’s correct, it will result in creators no longer using fulfillment centers in the UK. That’s unfortunate, because Gamesquest is awesome.
How Does VAT Affect Shipping Fees on Kickstarter?
Basically, like everything else, you need to budget for VAT. In the example above, you would add about $11 to your Germany shipping fee if you wanted to pass that fee on to the backer (which is a perfectly reasonable thing to do if you want to treat all backers equally. Otherwise your margins significantly change for a subset of backers).
What About Retail Backers?
You will need to issue a commercial invoice to retail backers in the EU that shows the 21% VAT included in the amount they paid. They’ll still have to charge VAT to rewards they sell to their customers, but the invoice gives them the opportunity to get a refund on the second VAT payment.
Are There Any Loopholes?
First, I should emphasize that whenever a backer asks you to mark a reward as a “gift” or list a lower declared value, they are asking you to break the law (even if they don’t realize it).
Second, according to Eurocrowd.org (credit to Jordan at Scofflaw Games for finding this) if your reward price is higher than the MSRP of the reward, you don’t have to pay VAT. I think that might be a typo, though, because I’m pretty sure that situation just allows you to charge VAT on the MSRP (i.e., if the MSRP is $30 but you charged the backer $40).
Third, you may have heard (including from me) that the declared value is based on the manufacturing cost of the product, not the reward price. This was once true, at least in the sense that it wasn’t clearly defined by any official organization. Remember, crowdfunding is a relatively new thing, and Kickstarter has always emphasized that they are not a store. Backers make “pledges” to assist with the creation of something, and that may result in them receiving a reward. However, despite this gray area between a donation and a purchase, governments around the world are starting to officially view pledges as sales transactions. So use such alternate calculations at your own risk.
If you want to dig deeper, I’d recommend reading the European Commission’s paper on the VAT treatment of crowdfunding (courtesy of Robert Zimmerman of Logistico).
Does the US Not Charge VAT?
There are very minimal import taxes for bringing goods into the US. Instead, the US uses a sales tax system, so US creators must charge sales tax to backers in the same state as your business. I don’t think non-US creators pay US sales tax.
I hope this helps! If you have any questions or if you’d like to offer any clarifications, please do so in the comments.
Also read: Shipping and Fulfillment and (if you’re in the UK or EU) read Mateusz Rakowski’s detailed comment.