CJEU rules on variable VAT rates for e-books and paper books

The Court of Justice of the European Union gave a ruling today in Cases C-479/13 and C-502/13 Commission v France and Commission v Luxembourg on the taxation of e-books.  According to the Curia website's media release:

France and Luxembourg cannot apply a reduced rate of VAT to the supply of electronic books, in contrast with paper books

In France and in Luxembourg, the supply of electronic books is subject to a reduced rate of VAT. Accordingly, since 1 January 2012, France has applied a VAT rate of 5.5% and Luxembourg a rate of 3% to the supply of electronic books.

The digital or electronic books at issue include books supplied, for consideration, by download or web streaming (‘streaming’), from a website so that they can be viewed on a computer, a smartphone, electronic book readers or other reading system.

The Commission has asked the Court to declare that, by applying a reduced rate of VAT to the supply of electronic books, France and Luxembourg have failed to fulfil their obligations under the VAT Directive [that's Council Directive 2006/112 on the common system of value added tax].

In today’s judgments, the Court upholds the Commission’s action for failure to fulfil obligations.

The Court points out, first of all, that a reduced rate of VAT can apply only to supplies of goods and services covered by Annex III to the VAT Directive. That annex refers in particular to the ‘supply of books ... on all physical means of support’. The Court concludes that the reduced rate of VAT is applicable to a transaction consisting of the supply of a book found on a physical medium. While admittedly, in order to be able to read an electronic book, physical support (such as a computer) is required, such support is not included in the supply of electronic books, meaning that Annex III does not include the supply of such books within its scope.

Moreover, the Court finds that the VAT Directive excludes any possibility of a reduced VAT rate being applied to ‘electronically supplied services’. The Court holds that the supply of electronic books is such a service. The Court rejects the argument that the supply of electronic books constitutes a supply of goods (and not a supply of services). Only the physical support enabling an electronic book to be read could qualify as ‘tangible property’ but such support is not part of the supply of electronic books.

The Commission also criticises Luxembourg for applying a super-reduced VAT rate of 3%, even though the VAT Directive prohibits, in principle, VAT rates lower than 5 %. The Court recalls that, according to the VAT Directive, a Member State may apply reduced VAT rates lower than 5%, provided that, among other things, the reduced rates are in accordance with EU legislation. Since the Court held earlier that the application of a reduced rate of VAT to the supply of electronic books does not comply with the VAT Directive, the requirement that it comply with EU legislation is not met with the result that Luxembourg cannot apply a super-reduced VAT rate of 3% to the supply of electronic books.

The judgments delivered by the Court today do not prevent Member States from introducing a reduced rate of VAT for books on physical support, such as paper books.

This blogger is somewhat confused as to where the court is heading. It seems that computer programs sold online, which are analogous in many respects to e-books, are treated like real books when it comes to exhaustion of rights, as in Case C‑128/11 UsedSoft, but that real books and e-books are treated quite differently when it comes to VAT.  Comments, anyone?

Taxation of e-books: Commission takes the initiative

Our friend Magali Delhaye spotted this piece of information in today´s Europa Midday Express and thought it might be of interest-- which it certainly is, being related to an earlier IP Finance post, "European Commission looks to level the playing field -- and the "paying field"", which appeared here last week.

“Taxation: VAT on electronic books in France and Luxembourg

The European Commission is asking France and Luxembourg to amend their VAT rates on electronic books (e-books).

Since 1 January 2012, France and Luxembourg have applied a reduced rate of VAT to e-books, which is incompatible with the current rules under the VAT Directive. Under the Directive, e-books constitute electronically supplied services, and application of a reduced rate to this type of services is excluded.

This situation is creating a serious distortion of competition to the disadvantage of operators in the 25 other Member States of the Union, as e-books can be easily purchased in a Member State other than that in which the consumer is resident, and current rules provide for application of the VAT rate in the Member State of the provider rather than that of the customer. The Commission has received complaints from a number of Ministers of Finance highlighting the negative effect on book sales in their domestic markets.

The Commission is aware of the different treatment being applied to e-books and printed books and notes the importance of e-books. Under the new VAT strategy, the Commission has opened this debate with the Member States and should put forward proposals before the end of 2013 (see IP/11/1508).

In the meantime the Commission, as guardian of the treaties, requires Member States to respect the VAT rules they themselves unanimously approved.

The Commission has therefore issued reasoned opinions to the two Member States. This is the second stage in the infringement procedure following the letters of formal notice sent in July 2012 (). The two Member States have one month in which to bring their legislation into compliance with EU law. Otherwise, the Commission may refer the matter to the European Court of Justice. (References: IN/2012/2098 and IN/2012/4080). (for more information: E. Traynor - Tel. +32 229 21548 - Mobile +32 498 98 3871)”.

E-books and the Challenge of Price

The Apple announcement of the iPad tablet has raised the question whether the hardware portion of the e-book market will be dominated by a dedicated reader or a multi-purpose device with e-book functionality. In addition to Apple, the sheer diversity of entrants into the e-book space, ranging from device manufacturers such as Sony, online purveyors such as Amazon, and book retailers such as Barnes & Noble, indicates the extent, to which the e-book platform is viewed, correctly or incorrectly, as a likely staple of how people will receive and read books and other contents in the near future.

No matter who wins, however, there still remains the question of how the e-book platform will impact on the traditional stakeholders in the publishing business, i.e., authors and publishers.The view is often taken the e-book is inherently a less costly production and distribution platform than the traditional book. The reason would at first glance appear to be obvious: with no printing, storage or shipping costs, the cost of an e-book must surely be set for a downward trajectory, with the result that books will become less expensive for publishers and therefore for consumers. This is supposedly true, even after one factors in the initial outlay for the reader device.

In truth, however, the situation is not so clear, as explained by Motoko Rich of the New York Times in a article that appeared on March 1 entitled "Math of Publishing Meets the e-Book". Rich notes that, while it appears that e-book titles will cost less their traditional counterpart, "... publishers also say consumers exaggerate the savings and [more importantly--NJW] have developed unrealistic expectations about how low the prices of e-books can go." Against this background, Rich goes on to consider the cost implications of producing and distributing an e-book and reaches some interesting conclusions.

As described by Rich, in order to understand the cost structure for the publisher, let's use a hardback book at a retail price of $26.00 as our baseline. The bookseller will pay the publisher half of that amount-$13. From that sum, the publisher pays $3.25 for print, storage and shipping (including returns). Printing and production functions such as cover design, typesetting and copy-editing, costs the publisher another 80 cents. Marketing will amount to a $1.00 or so, going up or down depending upon the title. Economies of scale on a per unit of book basis will also kick-in.

Let's not forget the author, of course. Assuming a royalty rate of 15%, the publisher must expend another $3.90. If an advance to the author has also been agreed-upon, there is a front-end outlay that may, or may not, be recouped against against royalties. This brings the net amount for the publisher to $4.05. From that the publisher still has to pay for office space and utilities. Based on the foregoing, it is easy to see why, for the traditional retail publishing business, blockbusters are crucial for financial success.

Will it always have a price?

And what about e-books? According to Rich, using the reported agreement with Apple, the following price scenario applies. The publishers will fix the price (although there have been some tension on this point), and the e-book retail platform then serves as an agent, with a commission of 30% per sale. Using a $12.99 baseline price (though there is no firm notion of what the price point range will be), the publisher is left with $9.09, from which he has costs of approximately 50 cents for file conversion and digital typesetting, plus an additional 78 cents. The author's royalty will a matter of negotiation, of source. Rich posits a 25% royalty on either gross revenue or the consumer price. All of this leaves the publisher with an amount in the realm of $4.56 to $5.54, to which overhead and related expenses must then be covered.

This looks like a good deal with the publisher. Not so fast though. C0ntrary to my impression, Rich suggests that publishers recoup costs and make material profits in the paperback segment of the book business. That argues in favor of a mixed model, where both the traditional book
industry and the e-book business will co-exist. However, if the price for the e-book product is similar to the price of a paperback book, the result may be that the paperback industry is severely hurt, eroding the profit potential for the traditional book industry. Whether the hardback market will itself then survive is a question.

Based on the foregoing, we can think of a number of less than socially desirable outcomes in an e-book world. First, there may well be a "e-book reader/computer tablet" divide between the haves and have-nots of the hardware device. Second, it remains to be seen whether the e-book space will allow for the kind of marketing and distribution that allow the traditional book business to introduce authors as well as provide the socio/tactile experience that only takes place in a bricks and mortar bookstore. If the traditional book business shrivels, the combined upshot may be fewer with the resources and access to books, and less choice for those lucky enough to have both the resources and ready access to book contents.

This may be nothing compared with the e-book divide

One thing is clear--we are only in the infancy of the e-book world, with consequences both benign and malign, socially beneficial and socially harmful, intended and unintended, before us.