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Author Topic: Reminder: be aware of potential legal Risks when working with Envato  (Read 10392 times)

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Tror

« on: January 02, 2016, 11:01 »
+23
Happy new year all!

Although this subject had been touched in other threads with more abstract and general character, I wanted to remind everybody who might not be aware of it that from January 01., 2016 on Envatos accountancy practices might bring trouble to you if you do not adapt your accounting, stop selling with them or react otherwise in accordance of your local law. This strongly depends on your personal situation and your country of residence!

Reason:

1. Envato reports the sales price (including their commission) to the Authorities. If you do reside in the US they effectively report the full sales price as your income to the IRS (1099). You have to report the same numbers to avoid an audit. Although their Profit is not your income and you never see that money you have to do this to be compliant. You can deduct their commission later then as your business "expense" to reduce your profit (as far as I know).

If you do not reside in the US they _might_ report those numbers to your local authorities depending on the double tax treaties, automatic exchange of information routines or your personal situation.

2. In many western countries the only legal way to deal with Envatos "business practices" is to write an numbered invoice for each sale to the buyer (not to Envato). If you are selling photos yes, for each single sale of a photo. The invoice has to state the full sales price, including Envatos commission, not only the cut you get and the Adress of the buyer.

After that, you may be able to deduct the commission as your expense as states in 1.

3. Envatos issues invoices on your behalf. In many countries these invoices are illegal and invalid since many countries require are certain ongoing numbering, languages and formats or require invoices to be registered with the local authorities before issuing.

Since you cannot do anything to stop Envato from doing so this might have legal consequences in case of any double check from your authorities.

4. If you are not from the US and do not provide a W8-BEN file they withhold taxes not only on your cut but on the sales price which includes their commission. The withholding of taxes is applied on all sales, not only us sales.

Furthermore they refuse to pay out your balance if no W8-BEN is on file or the provided data does not match the country where / for which you set the payment gateway up (e.g. they wont pay you to a US paypal account if you live in Canada).

WHY ALL THAT?


Envato insists to be a Marketplace where individuals sell their files directly to the buyer. Envato refuses to appear as a "seller" on any invoice or to take up responsibility for the business transactions involved (despite maybe the payment transactions and site functionality - correct me here if I am wrong). They put most of the legal, administrative and accounting burden on the contributors shoulders. I presume they try to avoid administrative costs and potential legal issues with it despite acting like a agency, but I can only guess.

For full information please check Envatos site.

- If you in your country/personal situation can comply with Envatos new policies without getting into shady situations with your local authorities you are fine.

- If you have doubts regarding your situation please inform yourself further and talk to your accountant or a local lawyer.

- If you do not want to cope with the potentially outrageous amount of accountancy involved (again, depending on your personal situation and COR) or do not agree otherwise with their policy you should consider removing your Portfolio.

- If Envatos policy and business practice is not in harmony with your local laws you might effectively violate the law with every file sold from January 1., 2016 on. Please talk to your local accountant or lawyer. In that case I suggest you remove your Portfolio ASAP.

I compiled all this information according to my best knowledge. Please double check on the official site and correct me if I am wrong.

Thanks all
« Last Edit: January 02, 2016, 13:15 by Tror »


« Reply #1 on: January 02, 2016, 13:16 »
+2
Thanks Tror, very helpful!

« Reply #2 on: January 02, 2016, 14:07 »
+4
Thanks Tror, I dropped Envato two weeks ago.

« Reply #3 on: January 02, 2016, 15:39 »
+1
Tror, are you an accountant or tax lawyer?  If so, please let us know so we have evidence that your conclusions are right.   If not, your post is pure conjecture. 

« Reply #4 on: January 02, 2016, 16:42 »
+7
Don't worry PB, as a registered business owner in another country most of what he states rings true.  Without reading the OP again to see if it's there, the missing item would be sales taxes (presumably if you live in the same state as the purchaser).  Because Envato wants to make it look like the Country of origin of the sale is where YOU are physically located you would also be responsible for collecting and remitting the sales taxes.  I am a registered business and would be required to collect GST for any Canadian sales and PST for any Provincial sales.    It would be especially terrible for the Californians because different areas had different taxes when I last sold there.

I am not with them, but I'd think long and hard before sticking it out.  They don't let you set your prices.  They don't let you collect the funds in real time.  They vet your products.  They do everything an agency does EXCEPT the fundamentals that you pay them 60% or whatever it is for.

On this page http://photodune.net/become_an_author

They on a $100 item there is a buyer fee of $20 which puts it at $80.  Indie sellers get $36 (or 45%) of that $80 portion of the $100 selling price. 

Envato collects $20 buyer fee and 55% of $80 which is $44 - or it looks like they collect 64% to me, leaving sellers with what is actually 36% and they can't even act like an agent for that cut!

Unbelievable.

« Reply #5 on: January 04, 2016, 18:34 »
0
Thanks Pixart.  Good explanation.   Unfortunately I average several hundred a month payout from Envato.   Adds up to 2-3k per year.  Its a lot to give up.  I would rather find a way to work out the tax issue with my accountant if possible.

« Reply #6 on: January 04, 2016, 20:46 »
+4
Thanks Pixart.  Good explanation.   Unfortunately I average several hundred a month payout from Envato.   Adds up to 2-3k per year.  Its a lot to give up.  I would rather find a way to work out the tax issue with my accountant if possible.

It is a hassle indeed but I think as long as you can write off on a 1 for 1 basis the "fees" then it's a little extra work on record keeping, at least in the USA. The real effort is record keeping, but your net taxable income should be the same, just managed differently by your accountant as a business expense. I don't make much with Envanto so I may close my account. I've already closed three accounts in the last few weeks. What's one more?

« Reply #7 on: January 05, 2016, 13:21 »
+3
I'm in the US and this new policy was a total deal-breaker for me with Envato. When the news broke that this policy was going through, I quit.

I still don't get how they are legally pulling this off, acting as a "marketplace" to facilitate transactions between buyer and seller, but then also claiming what they pay out to the seller via 1099. Under this kind of system, wouldn't the buyer be the one claiming the expense since the seller is theoretically invoicing the buyer directly? Seems like Envato wants to get the benefits of both ends of the transaction, acting like an agency when it suits them, then acting like a marketplace when that part benefits them as well.

It's all very convoluted and completely goes against the stock business model. Envato can do whatever they want, it's their problem if they run afoul of the IRS in the US. But I'm not having any part of it. Glad to be gone from there.

« Reply #8 on: January 05, 2016, 14:44 »
+2
It is a hassle indeed but I think as long as you can write off on a 1 for 1 basis the "fees" then it's a little extra work on record keeping, at least in the USA. The real effort is record keeping, but your net taxable income should be the same, just managed differently by your accountant as a business expense. I don't make much with Envanto so I may close my account. I've already closed three accounts in the last few weeks. What's one more?

Hi,

I'm from the UK and with Envato and earn quite a bit of money there with some graphics stuff. Wouldn't want to drop them...
I can understand the points of criticism, Envato acting like an agency but refusing to be one when it suits them. And I do wonder how the inland revenue is going to deal with them.

But what I don't understand: Why should contributors worry about anything? As long as we declare the income correctly, we have nothing to fear, right?
Whatever Envato think they are (agency or marketplace): as long as I declare my income correctly, that should suffice the tax office.

Income:
Each individual sale's invoice (issued by Envato in my name, to the buyer) has the item price on it. That accounts as my income.
From what I can tell, the invoices Envato issue in my name suffice UK tax law: they have a date, invoice number,  etc...
And thanks to Envato's downloadable CSV, it is possible to automatically add up the individual sales invoices, using a formula in Excel.

Expenses:
Once a month, I get an invoice (from Envato to me) for their Author Fee. That accounts as my expenses.

So, whatever goes into my bank account equals the balance between Income and Expenses, i.e. nothing to fear.
Or am I missing something / being naive?

« Reply #9 on: January 05, 2016, 14:51 »
+2
Nothing to fear?  Naiive?  You may be in the U.K. but I am in Canada.  I am a business.  If I am the Country origin for my sales (and NOT Australia where the payments are processes) I am required by law to collect PST from anyone who buys from me from the Province of Manitoba.  I am required by law to collect GST from anyone who buys from me in the Country of Canada  (Not everyone has a GST number here, but I do).  I don't see Envato offering to collect these taxes.  Am I supposed to pay them out of pocket?  Do I run the risk of being audited and paying them anyway, plus penalties, legal fees and possibly serving jail time?  No, I don't sign up in the first place.


« Reply #10 on: January 05, 2016, 15:19 »
+5
Selling digital files direct in Europe can cause problems with VAT rules, so Envato have made it difficult this side of the pond as well.  I deactivated my portfolio to avoid the potential VAT problem.  Not going to trust a site that makes it difficult for contributors.  Buyers will go elsewhere if we avoid sites that make things difficult for us.  If we carry on using them, other sites might try becoming a marketplace and then we have even more paperwork to deal with.

« Reply #11 on: January 05, 2016, 16:36 »
0
surely their lawyers have investigated any fiscal construction and what they do should be legal, no?

« Reply #12 on: January 05, 2016, 16:46 »
0
  Buyers will go elsewhere if we avoid sites that make things difficult for us.  If we carry on using them, other sites might try becoming a marketplace and then we have even more paperwork to deal with.

I buy from themeforest and graphicriver from time to time and was thinking I should probably shop elsewhere too.  Not that they'll miss me I'm only a 2 or 3 times a year customer!

« Reply #13 on: January 05, 2016, 16:53 »
0
surely their lawyers have investigated any fiscal construction and what they do should be legal, no?

One would hope, but it's hard to believe any tax lawyer signed off on this mess with a thumbs up.

« Reply #14 on: January 05, 2016, 17:10 »
0
but if it is all legal, however messy, it still would be no issue for a lawyer to ok it

« Reply #15 on: January 05, 2016, 17:58 »
0
Nothing to fear?  Naiive?  You may be in the U.K. but I am in Canada.  I am a business.  If I am the Country origin for my sales (and NOT Australia where the payments are processes) I am required by law to collect PST from anyone who buys from me from the Province of Manitoba.  I am required by law to collect GST from anyone who buys from me in the Country of Canada  (Not everyone has a GST number here, but I do).  I don't see Envato offering to collect these taxes.  Am I supposed to pay them out of pocket?  Do I run the risk of being audited and paying them anyway, plus penalties, legal fees and possibly serving jail time?  No, I don't sign up in the first place.

I also run my own business, doing my tax return at this very moment. "Fortunately" (in this case), I don't earn enough to be VAT-registered. So for the time being, I don't worry too much about it. That being said I'm not impressed with Envato's weird "agency-marketplace" behaviour. (And I will read up more about that Envato-EU-VAT conundrum). I may have to leave them sooner or later but not quite yet.

Anyway. For Canadian & US authors, I found this page from Envato:
newbielink:https://help.market.envato.com/hc/en-us/articles/204355790-How-to-Manage-Your-Sales-Taxes [nonactive]

On the bottom of that page, they say: "The amount shown on your invoices will be inclusive of any applicable sales taxes to buyers."
Sounds like Envato ARE indeed collecting taxes in the contributors' name. And IF(!) they're paying these taxes to the contributor, then the contributor can pass them on to the government. But whether that REALLY is the case, only a Canadian or US author will be able to tell. (Anyone from N-America here selling on Envato, who could shed some light on this???). Envato's downloadable CSV definitely contains 3 columns for EU & US taxes.

Of course, this still means a lot of admin work for the contributor. And it'd be easier for everyone if Envato simply behaved like any other agency.
But at least it'd be legal, no?

« Reply #16 on: January 05, 2016, 20:06 »
+1
.... It would be especially terrible for the Californians because different areas had different taxes when I last sold there.
.....
 
it's worse ... in the US we don't have any national VAT, but eah locality gets to decide -- so, many states have multiple sales taxes -- state, city and county taxes all combine

and IANAL, but including the sales tax in the price is usually not allowed - it has to be listed separately - so selling a file at $10 and saying 'sales tax included' is not acceptable when the sales tax varies by state or province

« Reply #17 on: January 05, 2016, 23:24 »
+4
...

But what I don't understand: Why should contributors worry about anything? As long as we declare the income correctly, we have nothing to fear, right?
Whatever Envato think they are (agency or marketplace): as long as I declare my income correctly, that should suffice the tax office...

I'm in the US and except that I already dropped PhotoDune when they started this fiction over it being a marketplace not an agency (over VAT) I would have dropped them over this.

I am sure that in the UK as well as the US, there are disagreements between the Inland Revenue (IRS) and the taxpayer over what the "correct" income is. Therein lies the rub.

The issue is that a tax audit costs you a lot of time and potentially money if you need to hire a lawyer or CPA to address the issues raised. Given the earnings I had from PhotoDune (which was pretty disappointing and thus fairly easy to drop) taking the risk of them costing me hassle, time and money over an audit wasn't worth it. Even if it all comes out right in the end somehow - it's the mess in the middle I worried about.

« Reply #18 on: January 06, 2016, 04:26 »
+4
Nothing to fear?  Naiive?  You may be in the U.K. but I am in Canada.  I am a business.  If I am the Country origin for my sales (and NOT Australia where the payments are processes) I am required by law to collect PST from anyone who buys from me from the Province of Manitoba.  I am required by law to collect GST from anyone who buys from me in the Country of Canada  (Not everyone has a GST number here, but I do).  I don't see Envato offering to collect these taxes.  Am I supposed to pay them out of pocket?  Do I run the risk of being audited and paying them anyway, plus penalties, legal fees and possibly serving jail time?  No, I don't sign up in the first place.

I also run my own business, doing my tax return at this very moment. "Fortunately" (in this case), I don't earn enough to be VAT-registered. So for the time being, I don't worry too much about it. That being said I'm not impressed with Envato's weird "agency-marketplace" behaviour. (And I will read up more about that Envato-EU-VAT conundrum). I may have to leave them sooner or later but not quite yet.

Anyway. For Canadian & US authors, I found this page from Envato:
https://help.market.envato.com/hc/en-us/articles/204355790-How-to-Manage-Your-Sales-Taxes

On the bottom of that page, they say: "The amount shown on your invoices will be inclusive of any applicable sales taxes to buyers."
Sounds like Envato ARE indeed collecting taxes in the contributors' name. And IF(!) they're paying these taxes to the contributor, then the contributor can pass them on to the government. But whether that REALLY is the case, only a Canadian or US author will be able to tell. (Anyone from N-America here selling on Envato, who could shed some light on this???). Envato's downloadable CSV definitely contains 3 columns for EU & US taxes.

Of course, this still means a lot of admin work for the contributor. And it'd be easier for everyone if Envato simply behaved like any other agency.
But at least it'd be legal, no?
If you are in Europe, they changed the law for selling direct to other businesses in EU counties, so if you sell anything on Envato to an EU business in another country, you may need to keep records on who buys your images and pay VAT.  There's no problem selling through an agency, as you aren't selling direct.  That was enough for me to stop selling through Envato.  I would suggest anyone in EU countries should check up on the 2015 VAT changes.  There are ways of dealing with this but I like to know I wont get in trouble with the VAT man and Envato seems to be acting like an agency but wanting to be a marketplace and that is too confusing for me.

angelawaye

  • Eat, Sleep, Keyword. Repeat

« Reply #19 on: January 06, 2016, 12:19 »
0
This is a screenshot of my earnings. So what you are saying is that they are going to consider my earnings "$42.40" even though I technically only receive "$18.86"? 


Where does the difference go on the MISC 1099? This doesn't look good ...

Tror

« Reply #20 on: January 06, 2016, 13:11 »
+1
This is a screenshot of my earnings. So what you are saying is that they are going to consider my earnings "$42.40" even though I technically only receive "$18.86"? 


Where does the difference go on the MISC 1099? This doesn't look good ...


They will report $42.40 as your income. The rest is your problem > you have to declare the 23.32 in fees as your business expense to the IRS and maybe keep records and prove about that in case of a audit.

« Reply #21 on: January 06, 2016, 13:36 »
0
This is a screenshot of my earnings. So what you are saying is that they are going to consider my earnings "$42.40" even though I technically only receive "$18.86"? 


Where does the difference go on the MISC 1099? This doesn't look good ...


They will report $42.40 as your income. The rest is your problem > you have to declare the 23.32 in fees as your business expense to the IRS and maybe keep records and prove about that in case of a audit.


And if in the USA, probably declare taxes due on USA sales.

angelawaye

  • Eat, Sleep, Keyword. Repeat

« Reply #22 on: January 06, 2016, 14:31 »
+5
That is insane! I just emailed them about closing my account. Not worth it for me ...


 

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