European E-Book Sales Hampered by Tax Structure

Despite taxes on e-books in Europe, e-book sales are estimated to rise 20 percent or more this year from 2010.

BERLIN — Damien Seaman, whose e-book was published in November in Britain, knows well the ups and downs of the creative process, from the high of landing on a narrative idea to the rigors of editing through to the final, satisfying moment of publication.

What Mr. Seaman, who lives in Birmingham, England, did not anticipate when writing his crime novel, “The Killing of Emma Gross,” a murder mystery set in Weimar-era Germany, was that his readers would have to pay a hefty tax that was not levied on any printed book.

Across most of Europe, e-books are taxed at full national value-added rates, which reach 25 percent in Sweden, Denmark, Hungary and other countries. Printed books, benefiting from an industry lobby, are taxed at a fraction of the full rates — and not at all in Britain.

It seems, Mr. Seaman said, that the value-added tax gap “discourages traditional publishers from innovating by effectively subsidizing them not to.”

Nevertheless, electronic book sales are growing quickly. The European Federation of Publishers, an industry group based in Brussels, estimated that e-book sales would rise 20 percent or more this year from an estimated €350 million, or $462 million, in 2010.

Sales of printed books, which account for more than 98 percent of all book purchases, are stagnating. Sales of all books reached €23.5 billion last year, down 2 percent after adjusting for currency fluctuations, from their level in 2007.

In the United States, e-books are subject to state sales taxes if the retailer has a physical presence in the state. They range from under 1 percent to 10 percent. Some states, like New York and, until next September, California, exempt e-books from the levy. Print books are subject to state sales taxes.

In 2010, U.S. e-book sales rose to $878 million, or 6.4 percent of the trade book market, according to BookStats, an annual survey of the Association of American Publishers and the Book Industry Study Group. In adult fiction, e-books accounted for 13.6 percent of all revenue in 2010, the group said.

In Germany, consumers pay 19 percent in VAT for e-book downloads and 7 percent on printed books. In France, the difference is 19.6 percent and 5.5 percent. Printed book taxes are 4 percent in Italy and Spain instead of 20 percent and 18 percent for e-books. In Britain and Ireland, the gap is widest: 20 percent on e-books, but no tax at all on printed books.

On Jan. 1, France will become the first E.U. member state to defy Brussels, lowering its taxes on e-books to 5.5 percent, the same rate as printed books. It had originally planned to reduce the rate in January 2011 but deferred the move, partly because of the poor state of its finances.

Spain has considered lowering its e-book VAT to 4 percent, and a petition is circulating in an effort to lower the levy in Britain.

The French and any who follow could be challenged by European regulators. European law prohibits the 27 E.U. member states from applying reduced VAT rates on e-books, which are, in legal terms, considered a service. Publishers have been unable to convince lawmakers to eliminate the discrepancy.

“For our customers and for the development of the e-book market in Germany, this would be an important step,” said Frank Sambeth, the chief operating officer of Verlagsgruppe Random House, the German publishing unit of the Bertelsmann media group. The company, which sells more than 5,000 German-language e-books, expects digital downloads to triple in Germany this year from 2010, Mr. Sambeth said.

The ongoing economic downturn is an obstacle. Some countries, like Germany and Britain, are reluctant to cut taxes during the downturn. VATs generate about 22 percent of an E.U. country’s total tax revenue, according to European Commission statistics.

The other hurdle is Europe’s convention of taxing online book sales at the rate imposed by the country of the seller, not the buyer. E.U. countries have agreed to change the calculation to the country of the buyer in 2015. Until then, countries with big publishing operations, like Luxembourg, where Amazon has its European headquarters, are reluctant to allow neighbors lower VAT rates and perhaps lure away business.

“Publishers are getting into the e-book world and have an interest in seeing all of their products treated in the same way,” said Enrico Turrin, an economist at the European publishers’ federation.

Allan Guthrie, co-founder of Blasted Heath, an online publisher in Glasgow, which published Mr. Seaman’s new crime e-book, said there were moral and logical arguments for reducing e-book taxes.

Britain, by maintaining a 20 percent levy on e-books, is only driving buyers to Amazon Europe in Luxembourg, where the tax is just 15 percent, he said.

“From the perspective of any U.K.-based publisher, writer or reader, it makes no sense whatsoever to be passing along 15 percent of the money generated from a rapidly escalating market to Luxembourg,” Mr. Guthrie said.

Algirdas Semeta, the European commissioner for taxation, customs union, audit and antifraud, plans to update the rules for determining which goods and services qualify for reduced VAT rates. But whether his recommendations would change how e-books are taxed remained to be seen, he said.

“Some people argue strongly that the huge differences in the way printed books and e-books are distributed and used need to be reflected in their tax treatment,” Mr. Semeta said. “Others say that we need to respect progress in technology and allow e-books a chance to establish themselves on an equal footing to paper books.”

Mr. Semeta, a former finance minister of Lithuania, has not said when he plans to publish his recommendations and action in 2012 is not guaranteed.

On Nov. 17, the European Parliament passed a nonbinding resolution urging a reduction in taxes on e-books.

“Isn’t it just common sense to think that e-books should benefit from the same reduced VAT rates as physical books?” said Neelie Kroes, the European commissioner for the digital agenda, during a speech in Avignon, France, last month. “The legal regime — the E.U.’s own, I admit — makes it illegal to do that. Not just discouraged, but illegal. Personally, I find this very difficult to explain.”