The laws of VAT and music – a note to end the year

January 1, 2015 – from this day onward the European Union requires anyone selling digital products (downloadable music, eBooks, video courses) to individuals in the European to charge VAT based on the country where the buyer is based (as opposed to where the seller is based). That means two things: 1) sellers have to administer what they sold, separately, for each of the 28 countries of the European Union, and 2) they have to transfer the received VAT money to each of these countries monthly or quarterly, depending on local tax laws. According to EU representatives, the law prescribing all this has been put into effect to prevent large vendors, like Apple (iTunes), Amazon and Google to base their European offices in low VAT countries like Luxembourg. A good idea, from a tax collecting perspective, but is it such a good idea when looked at from different angles? From a free market perspective, it is somewhat annoying, but looking at people selling online courses or music at a small scale it gets worse. As a music lover especially the former of these two affects me and the people I interact with a lot – musicians, fellow music lovers and anyone buying digitally downloadable music. Actually, this law led to a few interesting discussions on Facebook, which bring to light different points of view, but also issues the EU legislators had apparently overlooked.

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First of, a lot of independent artists selling their music on site like Bandcamp or CDBaby announced they were going to stop digital downloads, because they could not afford the time and money involved in keeping a full administration on this. At least one small record company, US based, announced to follow the same step and stop offering digital sales via Bandcamp to European customers. Luckily, CDBaby, and on December 30th also Bandcamp, announced that as larger bodies, they would offer the service to their customers (the bands and small record companies) to take care of VAT administration and payment. Size reduces cost, but there’s two sides to this part of the story: apparently, the EU had not taken into account these smaller vendors (the FAQ on the EU’s web site actually claims that 90% of online sales is business-to-business, which is subject to different VAT legislation), but does not tell how much of the remaining 10% is related to the small vendors mentioned above and how much to the large companies the law makers actually tried to deal with. At the same time however, a lot of small vendors (bands mainly) only started complaining at the end of December, while the change in legislation was already announced in June or July 2014. Lucky for them, their umbrella sites CDBaby and Bandcamp were paying attention – let’s hope they can all make an appropriate deal and continue offering their materials. After all – in the end the bands are affected, because us listeners will not be able to buy their stuff. Well, if they offer also CD or maybe vinyl, we could, but for many that would raise the price bar to high (because of shipping cost mainly). No sales means no money. Nice extra detail to that: many banks, certainly outside Europe, charge money for international transfers, in some cases up to $35 per transaction. Imagine having to pay that as a band for a limited set of digital sales to 28 different banks in as many different European countries…

Another point of view came up in a Facebook discussion started by an artist. This particular artist is very fond of selling a physical product, like a CD or a vinyl album, including nice packaging, lyrics sheets and possibly some extra goodies. He would love his buyers to get these, with all the love and care put in to them, rather than just buying the downloadable version of the music. For the genre of music from which my main sources of reference come, including this one, i.e. progressive rock, this is something that dates back to the packaging approach started in the 1970s by bands like Yes and Pink Floyd.

In this discussion the issue was brought up that besides the packaging the quality of digital audio also plays a role – it is possible to deliver digital music at bit rates higher than what can be supported by a CD. However, the audience for that is still limited, even in progressive rock a lot of people still are pretty happy with the sound quality of CD or vinyl, or ignore these high bit rate options because they don’t want to put a computer in their living room to play music. Or prefer to have the physical product of course.

Bottom line, we should not forget a number of things, and it would be great if our law makers in Brussels would do the same in the future:

  • Not everyone selling digital content is a large vendor, with enough money to pay for professional book keepers
  • Digital is not the only option, some people still prefer the physical product, alone or next to digital downloads, so lets not pretend as if digital downloads are the only future direction
  • If companies like CDBaby and Bandcamp would not offer VAT administration and payment to Europe as a service to their customers, a lot of bands and independent record labels would be out of business right now and we’d be deprived of their music
  • Being an independent artist or record label, offering digital downloads, makes you a business (wo)man, and entrepeneur – think carefully and think ahead
  • Putting this type of laws into effect, without taking the above into account, might drive people back to illegal downloading of music, just when we at least get the idea that that practise is decreasing

I wish you all a very happy and musical 2015!