Have you ever ordered shoes, a book, or some furniture online? What about signing up for a movie-streaming subscription, or a cloud storage service? I bet you remember your parents sitting at the kitchen table, looking through a catalogue and ordering something via snail mail.
All of these purchase are what’s called “distance sales.” Distance selling occurs whenever goods or services are sold without any face-to-face contact between the supplier and the buyer.
Distance sales include any made by mail order, through TV shopping, over the phone (whether voice calls or SMS), or ordered on the internet. These are physical products and digital goods, though digital goods fall under a different EU tax category (telecommunications, broadcasting and e-services). More on that later!
In the EU, there are a few more qualifiers around distance selling. It particularly applies to any goods that must cross borders to a buyer in another EU country. The buyer is not registered for VAT, which is to say that buyer is a private citizen and not another business.
Beyond that, the EU has a ton of distance selling regulations (DSR), designed to protect European consumers from scams, fraud, and just low-quality or misrepresented products. Of course, that’s not what you’re in business to provide! Never.
So in order to protect your business and avoid making costly mistakes, it’s crucial you understand exactly what’s expected of you as a distance seller. Read on to learn what you need to know!
Different forms of distance selling
Your website Whether you have an independent domain or sell your products through a service like Shopify, every online sale you make is considered a distance sale.
Marketplace (Amazon) Many businesses opt to sell through an accredited online marketplace like Amazon. There are different terms depending on the site, such as who will store your goods, who will deliver them, and who will handle VAT.
Since Amazon is king in this area, here’s a bit more insight into how it works. Amazon offers many services to fulfill your orders and complete the distance sale, a suite known as Fulfilled By Amazon (FBA). If your goods are stored in another country from where you’re based, then any sales in that storage facility country are not considered distance selling. Pan-EU FBA option allows Amazon to store your goods at any of the 7 European warehouses. As a result, opting for Pan-EU can have a lot of tax consequences for your business. If you opt out, then your goods are stored in your home country and only shipped once purchased.
Online auction (eBay, eBid, Bonanza) Businesses selling products via internet auction sites are still beholden to the same distance selling regulations. Some sites might be in possession of your products and control the shipments; other sites just offer the selling platform and let you take care of the heavy lifting.
SMS Within the world of mobile commerce, SMS purchases and payments aren’t a widely-used method of distance selling. Back in 2008, Amazon announced its TextBuyIt service, which allows shoppers to search, select, and buy products right in their text messages.
Telesales / Outbound sales An oldie but a goodie, the over-the-phone sale is one of the first forms of distance selling. Telesales scripts should be meticulously drafted according to distance selling policies. Since there’s no visual element to this sale, all information about the product — and all terms about the contract — must be explained verbally, on that same phone call. Then the seller must follow up with a written version.
TV This includes any kind of interactive TV program that requests and receives payment from a buyer. Television shopping networks, as well as in-TV movie rentals, all do business within the world of distance selling.
FREE CHART: Distance Selling EU Thresholds and VAT Rates
Use this handy chart of all EU thresholds and VAT rates for distance selling to save time when filing taxes at the end of each quarter.
All of the DSR are designed to protect the consumer. To give you a sense of how extensive and specific the regulations are, here’s a quick overview:
Must provide detailed, thorough information before the contract is signed.*
Any charges or extra fees must be explicitly stated and agreed to by the customer. No pre-ticked boxes!
The point where a customer clicks to complete a purchase or contract must use a Call To Action such as “Buy Now” or “Pay Now” — something that clearly states payment is expected.
Must provide contract in a durable form (print or email), sent as soon as the contract is confirmed.
You must offer returns and refunds, with a 14-day minimum. There’s a seven-day cooling off period, during which a customer can cancel for any reason. Then the customer is granted seven more days to test their satisfaction with the product. (If any information about the sale is missing or inaccurate, then the buyer has three months to cancel the contract or return the product — potentially for a full refund at your cost.)
*This will be a long asterisk note. That’s because there’s a hefty amount of information you have to provide the customer before the sale even takes place.
Display how customers can pay and include delivery options and costs
List the steps involved in a customer placing an order
List what languages are available
Your business name, email address, and sometimes your physical address
Your VAT number (if your business is registered for VAT)
The cost of using phone lines or other communication to complete the contract (if need be)
A description of your goods, services or digital content - include as much information as you can
The total price or how this will be calculated
The total delivery cost or how this will be calculated
The minimum length of their contract
Any conditions for ending rolling contracts or contracts with no clear end date
Again, if any of this information is missing or inaccurate, the customer has the right to cancel or return up to three months later! Be sure to design your website, product listings, and checkout pages appropriately.
How EU VAT works for distance selling physical products
It all depends on annual sales thresholds. If your sales are below a threshold so far that year, you do VAT in your own country. If your year sales surpass a threshold, you do VAT in the other country.
If your total sales remain under the threshold of the customer’s country, then your sales are liable to VAT in your own membership state. You charge your local VAT rate, you owe that VAT to your home tax authority each quarter.
But as soon as your total sales in a certain country have hit the distance selling threshold, then your VAT liability switches over to that country for those sales and you must register for VAT in that country.
The distance selling thresholds do NOT apply to:
B2B sales. Any goods sold to buyers who have a valid VAT number!
Excisable goods (tobacco, alcohol, petrol) are always subject to VAT in the destination country. No threshold. You must register in those states.
Digital products! This we’ll cover in the next section.
How EU VAT works for digital products
Digital products are governed by different tax laws, even though the transactions are technically distance sales.
For B2C sales
If your business stays below €10,000 in cross-border sales of digital goods per year, throughout the EU, then you can charge the VAT rate of your home country on all those cross-border sales. This makes it much easier to comply with VAT, because you’re only using one tax rate on your digital goods. Once you pass that threshold, you charge the VAT rate of your customer's country.
For B2B sales
You charge the VAT rate of the customer’s country. If you’re selling to a customer abroad, then you don’t even think about your home country’s VAT. It’s always about the destination rate.
There are no registration thresholds. Even one sale in a foreign country requires you to be registered and compliant with their local VAT system. For this reason, it’s hugely helpful for digital businesses to register for a VAT MOSS, even more so than for businesses that sell physical goods. With a MOSS, you can avoid registering individually in each country where you make a sale.
Ultimately, the VAT MOSS makes filing simple, but the front-end of the tax process is still quite complicated! With every sale in the EU, you must know that you’re applying the right VAT rate. Are you above or below the threshold? Is your customer in Denmark or Germany? Do you have two pieces of location evidence that proves it?
Staying up-to-date on these questions — with every sale — just isn’t feasible for a business owner to do on their own. Okay… we don’t want to underestimate you! Maybe you can do it, but do you really want to?
You can save time and hassle by using a tax software that automatically collects location evidence, applies the right VAT rate, sends proper tax receipts, and generally stays on top of any VAT regulation changes. That’s Quaderno, in a nutshell. We do a lot more to make your life easier, but we’re especially proud of our automatic digital tax services. We navigate the maze so you don’t have to! If you want to give us a try, please sign up for our free trial.
* At Quaderno we love providing helpful information and best practices about taxes, but we are not certified tax advisors. For further help, or if you are ever in doubt, please consult a professional tax advisor or accountant.