Etsy this week announced a change to the way seller fees would be handled for sellers residing in the European Union (EU). If you are a seller in Europe, this change will affect you. If you are based outside of the EU then your fees will not change and you can ignore this announcement.
From 1 May 2016, Etsy's service fees will finally become VAT compliant which means that businesses without a VAT ID will be paying more for their products to be sold through Etsy.
Essentially, Etsy will start charging VAT on all of their listing and transaction fees as they come under the category of "digital services" and thus fall under the VAT MOSS ruling.
An important note: This has nothing to do with your products, only the way they are sold via the Etsy Marketplace. Your product prices will not have VAT applied (unless they are digital, but that's another story for another time) and the price you charge the customer will not change, this is a change purely to ensure Etsy's own service is tax compliant.
What this means is that from 1 May 2016 onwards that you will be charged an additional amount on your monthly bill to cover any VAT tax you are liable to pay in order for Etsy to deliver their product to you.
This is calculated by:
- Where you are located in the EU
- If you have a VAT ID
If you are registered for VAT, Etsy can treat the transaction as a "business-to-business" one and charge you the tax-exempt price. If you are not registered for VAT then you will be charged the current basic rate of VAT for your country of residence as the transaction is now a "business-to-consumer" one. The exception to this rule is Ireland: as Etsy has an office based here all transactions are automatically attract VAT as this is the way VAT tax is applied for transactions within country borders.
All Ireland Etsy sellers will regardless of status immediately have a 23% hike in all fees as of June or July this year.
For example, if I am based in Finland and sell an item on Etsy the tax applicable to the Etsy Fee is 24%. So, if an Etsy fee for a transaction before midyear was $1.40 USD, this would now be $1.68 USD including the 24% tax (an increase of $0.28). If I have provided a VAT ID to Etsy before this change, I would be charged $1.40 as the tax would not apply.
How is Direct Checkout affected?
One of the interesting things about this change is that it also applies to Direct Checkout fees. As this is a digital service that Etsy provides it thus attracts tax. PayPal, on the other hand, is a financially registered authority and processes payments under this authority so therefore does not need to charge tax.
This means that for a sale on Etsy, not only will you need to pay tax on your fee for selling the item, but also on the Direct Checkout fee also.
For the Finland example above, both the Etsy fee and the Direct Checkout fee will both be taxed at 24%. Depending on the price of your item, this means that your costs can start quite quickly mount up if you need to pay this new tax.
If you haven't opted into Direct Checkout yet, then your transaction via PayPal will still be tax-exempt. If you haven't already switched to Direct Checkout, it may be worth checking to see if you are better off sticking with PayPal due to this situation.
How do I register for a VAT ID?
You need to register for VAT only in the country in which you are based. You typically don't need to register for VAT if you are under a sales threshold, but you can do so voluntarily if you wish. Keep in mind however that registering for VAT comes with quite a few additional responsibilities and bookkeeping overheads that may or may not be reasonable for your situation. These include charging the correct amount of VAT for the products that you sell, keeping track of VAT taken and remitting it back to your authority via regular VAT returns. On the plus side, registering for VAT also means you can claim back any VAT paid on purchases made that are directly related to your business.
How do I provide my VAT ID to Etsy?
Once you have your VAT ID, you'll need to enter this in on your Account Settings pages within Etsy. You can find this option by navigating to You > Account settings > VAT ID
- If you are in the EU and are not registered for VAT, you will be charged tax on all Etsy fees from 1 May 2016.
- Sellers based in Ireland will, regardless of VAT registration status, be charged 23% tax on each Etsy fee.
- All EU sellers that have provided a VAT ID to Etsy will from this week receive invoices that now clearly display the amount paid in VAT (Until the mid-year change is implemented, this amount will be zero for everyone.)
- The tax will apply to all digital services that Etsy provides. This includes Listing Fees, Seller Fees and also Direct Checkout Fees.
- If you haven't opted into Direct Checkout, your PayPal transactions should be tax free.
- If you are likely to be caught by the VAT change, it is a good idea to start recalculating your prices on your products to ensure that the rise in Etsy fees will not overly affect your profit margin.
April Update: Etsy has announced the date for the VAT change as 1 May 2016.