Publishers Weekly - LBF Show Daily April 14 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 significant 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 de;ned 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 de;nition of an “electronically supplied service.”

Uncertainty

The immediate problem is that national VAT rates for electronic services are signi;cantly 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 bene;t for retailers headquartered in Luxembourg,
European publisher, author,
and bookseller organizations
are vociferously protesting the
ECJ ruling. “We, the representa-
tives 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 re;ects technological prog-
ress, 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 ;les, essentially stating that downloading a legally acquired ;le “exhausts” the distribution right for that copy. Thus, the court ruled, a purchaser could theoretically resell a digital ;le (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 ;eld for digital and physical products, aiming to encourage ef;cient, 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.