Across the United States on Wednesday April 15th, people held “tea parties” to protest government spending policies. Here in Second Life, residents held their own tea party to voice their concerns about how politicians were spending tax money, as well as other issues.
Earlier, it made the news that the British government’s Department of Work and Pensions, with help from other departments, was running an “Innovations Centre” on Second Life. The sim (or site as the article called it), reportedly cost 20,000 British Pounds to set up and would cost 12,000 Pounds to run every year. It is not accessible to the general public. One Member of Parliament called this a waste of money, accusing those involved of “living in a fantasy world.” “I am as excited by technology as anyone. I just don’t necessarily think in these times that taxpayers’ money ... should be spent on things like this.”
A spokesman for the DWP soon responded, saying that the cost to get the sim was less than that, 6,000 Pounds. They explained the Centre was only a pilot project, but is developed to function like a real-life location. They defended the money spent, saying it will save taxpayers in the long run by allowing people to hold meetings online without having to travel, “We are currently exploring the potential use of Second Life, and have active interest from a number of Government departments. ... We believe it could help ... save taxpayers money as meetings, events, and shows can be held online at a fraction of the cost and resources.”
The DWP went on to suggest they could further cover their costs by allowing companies to “showcase” a product at the sim, in exchange for paying a fee. The Innovations Centre is up for renewal in 2011. There are no plans to make the sim accessible to other Second Life residents.
It's about 2 weeks ago now that Linden Labs announced that they would have to charge VAT to all account and island fees to any European Union located resident. Of course we covered this event in our Finance section when it happened, and another article about outraged residents visiting Robin Linden's office hours. Although Linden Lab (LL) has given some extra information about the backgrounds of it all, now that we have a better overview of the situation, and done some research, it is time to state some additional facts.
Who is affected?
When you created your account, you have filled in the country you live in. If this country is one of the 25 members of the European Union (EU), you are affected. The residents in the EU make up about 39% of all active accounts in SL (more statistics here).
Is Linden Lab correct in applying VAT?
Basically, yes. Back in 2002, the European Council decided that online services provided by non-EU countries are taxable in the EU state where they are consumed. The location of the servers, or statutory location, or address where the bills are coming from is not relevant. They consulted experts (and I bet they talked to tax authorities as well) concluded that if you live in an EU country, the service is consumed there. You have a browser on your local computer that is needed for the service to be rendered, or consumed as they say, and that alone is enough to consitute this fact.
Should we, or LL, pay back taxes?
The EU rule came into effect not long after the EC directive was issued. I believe it was sometime in 2003. This means that taxes should actually have been paid since then. But if we, the consumers, should have paid back taxes, LL would already have said so. Linden Lab has not said anything to date about this, so it is unknown how this works. They have probably paid those back taxes themselves (it would be a gargantuan administrative job to get all those taxes from their residents, especially where residents already have left SL. Or they might have made a deal with the tax authorities of the EU.
What effects does this have, financially?
Everyone in the EU has to pay taxes on their account fees and privately owned island fees (tier). The tax rate that you have to pay depends on the EU country that you reside in. Most of the countries have tax rates varying around 18-20%, some of them are lower (Cyprus 15%, Spain 16%) or much higher (Denmark 25%, Sweden 25%). Unless you have a company in Real Life that pays the bills (with a VAT id-number, in which case you can get them reimbursed), the prices are just increased by the applicable VAT rate.
But mind you, with the current exchange rate between the US dollar and the Euro, things are cheaper for Euro-users anyway. So that might make it a bit easier to accept.
And there is another aspect. If EU based people have to pay more maintenance fees for their sims (up to US$800 per year), they will have to get reimbursement. So the EU based sim owners will have to offer their land for resale or lease at a higher price than non-EU residents. That creates unfair competition.
Why all the outrage?
It comes naturally when people have to pay more. Especially when there is a price increase between 15 and 25%. However, what bugs most residents, is that there was no kind of advance notice. Some residents even received the email after the VAT was charged to them. And apparently, LL have been planning this for a while already.
On top of that LL does not seem to care about cultural differences between the USA and Europe. In the USA it's more common to advertise prices excluding taxes. In Europe, however, it's good custom to show prices including taxes. So even if people were assuming they were already paying taxes, it must have been calculated into the price already. Or at least should be now. On the other hand, this would pose a big problem for Linden Labs, because they would see their revenues go down a lot, and they would have to change pricing anyway, which would be unfair to the other 2/3 of the residents.
What's behind this?
Obviously, Linden Lab is obliged to do this. However, considering the lack of advance notice, and the way they handled this alltogether, seems to make clear that they don't care about their European residents as much as they care about the USA based residents. Could this have to do with the fact that European people are a pain in the butt already? Protesting the ban on gambling for instance? Or could it have to do with the fact that LL is getting Second Life ready to link to other virtual worlds? Who knows ...
Conclusion
The course of action around this VAT issue has upset a lot of residents. However, it is doubtful that a lot of people will leave Second Life over it, if any. But it will hurt the in-world economy, with the unfair competition issue at hand, as stated above. People will think twice before buying a sim of their own, or even increasing the land allowance on their premium accounts.
Other media
The Life4U Second Life tv station has already done an issue about this. I personally gave an interview about VAT, from my perspective as EU based resident, sim owner and accountant (my RL job). And of course every paper has spent at least some effort to cover the VAT changes.
Residents with questions about the newly imposed VAT crowded in to Robins office hours - standing room only - in fact people were even crowded around the sim shouting questions and hoping for answers. Robin coped well with this and did her best to respond - “this decision is based on tax advice. I'm not an expert, and can't debate it with you" Although Robin did promise answers would be forthcoming there is a lot of anger at the lack of communication from Linden Lab, it has not even warrented a blog post. It is nice to know that some Lindens can apologise - “I can apologize for not communicating better, but I can't help with questions about VAT." - but surely they also should have realised there are a lot of people waiting for answers! At least some sort of official recognition of their right to ask those questions. Robin did her best to answer some questions although as she said she is not a tax expert, she did reassure Europeans that they are not paying twice, which has been said, Linden prices do not already include American taxes; “There's a law that we had to obey. In the US we have taxes, but they don't apply to online business in the same way.” She also showed some concern “I really hope our European customers won't leave,” and her comment that Linden lab is looking into allowing fees to be paid in Linden Dollars went down well. Robin also promised to get a tax expert in to answer questions in Euro-friendly hours next week. Considering that Europeans make up about a third of the residents, this is going to hit an already depleted economy hard. One American stated “I'm American ... I can see the hideous advantage I get over the Europeans.” These taxes will hit not just Europeans' costs but also hit their tenents and employees, the results will be wide reaching and we are only just beginning to see the impact.
Across the United States on Wednesday April 15th, people held “tea parties” to protest government spending policies. Here in Second Life, residents held their own tea party to voice their concerns about how politicians were spending tax money, as well as other issues.
