E-books: Product or Service? Digital Spotlight 2015

In early March, the European Court of Justice (ECJ) issued a major ruling, invalidating reduced value-added tax (VAT) rates on e-books in France and Luxembourg. But most troubling, the court held that e-books are in fact “digital services” under the law, as opposed to products. If left unchanged, the ruling will result in signficant price hikes for e-books in the European Union—a disastrous development for an e-book market that is still emerging.

The ruling stems from an E.U. challenge to reduced VAT rates that were being charged on e-books sales in France and Luxembourg. Under the E.U.’s VAT law, physical books, newspapers, and periodicals (with the exception of pornography) are permitted a reduced VAT rate. And based on the not unreasonable assumption that downloadable e-books are equivalent in function to print books, France and Luxembourg had applied lowered VAT rates to e-books.

But in its March ruling, the ECJ asserted that the reduced VAT rates for books apply only to those supplied “on a physical medium.” Although the ECJ recognized that a physical device is necessary to read an e-book, it held that e-readers, tablets, smartphones, and similar devices are not intrinsically part of supplying e-books. Rather, the “supply of goods” as defined by the law refers only to “tangible property,” while e-books, which are “delivered over the Internet or an electronic network” with “minimal human intervention,” fall under the definition of an “electronically supplied service.”

Uncertainty

The immediate problem is that national VAT rates for electronic services are significantly higher than those applied to physical goods (see chart, p. 8), meaning that VAT rates on e-book sales—and thus consumer prices—are set to increase dramatically.

In France, for example, VAT rates for e-books will jump from 5.5% to 20%. In Italy, where the VAT rate on e-books was cut from 22% to 4% just last fall, the tax will now likely rise back to 22%.

In Luxembourg, a rock-bottom VAT rate of 3% had helped to entice e-book retailers like Amazon, Nook, and Kobo to base their European businesses there, since the VAT rate had intitially been based on the e-book’s country of origin. As of 2015, however, E.U. laws mandate that taxes on e-books be charged according to where the customer is located, limiting the tax benefit for retailers headquartered in Luxembourg, where e-book VAT rates will now likely rise to 17%.

European publisher, author, and bookseller organizations are vociferously protesting the ECJ ruling. “We, the representatives of the book value chain, strongly believe that the value of a book does not depend on its format or the way it is accessed by readers,” reads a joint statement from the Federation of European Publishers, the European and International Booksellers Federation, and the European Writers’ Council. “We urge the Commission to take swift action to amend the relevant legislation to ensure it reflects technological progress, and remove a serious hindrance to the development of the e-book market.”

Copyright Impact?

Meanwhile, there is another potential impact stemming from the court’s ruling that e-books are services: it could stop the resale of digital products. In a widely noted 2012 ruling in UsedSoft v. Oracle, the ECJ opened the door for the potential resale of legally purchased digital files, essentially stating that downloading a legally acquired file “exhausts” the distribution right for that copy. Thus, the court ruled, a purchaser could theoretically resell a digital file (A subsequent ruling has since narrowed that position somewhat).

But if the ECJ’s VAT ruling becomes policy and e-books are regarded as electronic services, it could further complicate digital resale—after all, how do you exhaust the distribution right of an intangible digital service? Consequently, any possible resale of downloaded digital content will almost certainly require the consent of the copyright holder, and the ability to “own” e-books as digital assets is likely to be more tightly constrained than ever before.

The E.U. has long made it a policy priority to create a level playing field for digital and physical products, aiming to encourage efficient, electronic marketplaces and promote the digital delivery of goods. But the court’s VAT decision was a catastrophe almost waiting to happen: E.U. laws and directives are a confusing mesh of clashing rules that are not easily rationalized. And that’s unlikely to change anytime soon.

It remains to be seen whether the E.U. will approve a policy change to address the VAT decision, and how it will square the ruling, or any policy change, with copyright regulations. But most European countries, even while trying to sustain and support traditional bookselling, are not eager to punish emerging digital book markets. And the publishing community certainly recognizes that fostering book sales—irrespective of format—is essential as competition for consumer attention intensifies in a pervasively networked world.

Peter Brantley is director of digital library applications at the New York Public Library, and a contributing editor at Publishers Weekly.

VAT Rates on Books in E.U. Countries and FEP Members 2015

Source: Federation of European Publishers

¹ 0% on certain textbooks

² Only for audiobooks (subject to interpretation) and books in braille

³ Reduced rate for audiobooks provided to charities for people with disabilities and visually impaired

⁴ Need further inquiry on limits and conditions

⁵ Only for audiobooks

Note: Lithuania plans to increase standard VAT to 23% at some point in the future; the Netherlands is considering increasing its reduced rate to 7%–8%; Italy is set to increase its standard VAT to 24% in 2016.