George Osborne's latest budget could spell an end to 99p song downloads by closing a tax loophole that meant consumers were paying VAT at very low foreign rates on online purchases of books, music and apps.
The chancellor will bring in new laws making sure that internet downloads are taxed in the country where they are purchased, meaning web firms such as Amazon and Apple will have to charge the UK's 20% rate of VAT. At the moment they are allowed to sell digital downloads through countries such as Luxembourg, where the tax rate is as low as 3%.
This should really come as no surprise. Remember, the European Commission announced in September that the EU tax laws on digital content would be changing by 2015. Today's story merely reflects the UK complying with the new EU regulations.
Under the new rules, retailers are going to be required to collect VAT based on the location of the customer. The change will affect all retailers, but it's only going to be a nuisance for online stores.
The old rule required retailers to collect based on their location. This encouraged some retailers to shift their digital operations to an EU member country which offered a lower VAT, thus enabling that retailer to have a slight competitive advantage. For example, Apple, Google, et al had been enjoying a Luxembourg tax loophole since that Duchy illegally lowered their VAT on digital content in December 2011. They dropped it to 3% from 15%, their regular VAT rate.
So how much will the ebook prices really increase?
At this point no one knows for sure, but the official estimates are suggesting that this move could add £300 million in tax revenues as retailers jack up prices.
But to be honest, I'm not sure Amazon is going to increase their prices. They do charge authors and publishers a delivery fee which is deducted from the 70% payment option, and that might be enough to balance out most of the extra taxes they will be required to collect. Sure, this might sting Amazon's pocketbook, but it would also give them an advantage that will hurt their competitors even more.
image by me and the sysop