Hack14.Avoid Falling Foul of the Taxman

Hack 14. Avoid Falling Foul of the Taxman

Pay the proper Sales and Use taxes and Value Added Taxes (VAT) to avoid the wrath of the taxman. Some people may even qualify to claim back VAT!

Works with: all versions of Skype.

A shockingly large proportion of most regular telephone bills comprise fixed charges and taxes. In my case, before switching to Skype, fixed charges and taxes represented fully 56% of my total bill. Fixed charges seem to guarantee that your telephone company, often a state-run entity or regulated monopoly, will make a profit before you even lift the handset to make a call. At the same time, the taxes on your phone bill have become the means by which government funds new, and wasteful, crackpot schemes. Well, no more.

By switching to Skype, you can easily and legitimately sidestep many of the fixed charges and fees. Also, you can legally avoid many, but alas not all, of the taxes.

Over the years, your regular telephone bill has accumulated quite a few "special" taxes, similar to the way in which barnacles accumulate over time on the hull of a ship. Neither can be said to be particularly advantageous to forward motion. Some of these "special" taxes were introduced long ago as only a "temporary measure" but, surprisingly, are still with us today. You can sidestep these "special" taxes if they are specific to your regular telephone bill and to the regulatory environment within which your telephone company operates.

What you cannot avoid are the "consumption" taxes that are applicable to all products and services you consume, including those from Skype. In the U.S., these consumption taxes are typically known as Sales and Use taxes, and may be levied at the state and local level. In the European Union (EU), they are known as Value Added Tax, or more simply, VAT. Similar taxes apply the world over, though under different names.

Often, these taxes are collected at the source and are folded into the price of the product or service and collected on behalf of the taxman by the vendor. However, when they are not so collected, your obligation to pay them does not go away.

All this talk about taxes might be somewhat stupefying. But the good news is that even after applying a Sales and Use tax or VAT to Skype's incredibly low rates, your overall tax burden for your telephone service will almost certainly be much less than before. And casting off all those "temporary" and "special" taxes specific to your regular telephone bill sure feels goodand is beneficial to your wallet!

2.3.1. U.S. Sales and Use Tax

Typically, Skype does not charge VAT or any other tax on its services if you reside outside the EU. That means U.S. buyers of Skype services are not charged any tax.

In the U.S., each state has its own Sales and Use tax rate (for some states, the rate is 0%). If this tax is not collected (as a sales tax) by the vendor of a product or service you buy, you are still liable for it (as a use tax) and must remit the tax owed. You have, in effect, been nominated by your state as your own tax collector. Individuals usually remit this tax as part of their individual state annual tax return, and businesses usually remit specific Sales and Use tax forms and payments quarterly. In addition, your local tax jurisdiction (town, city, county, or borough) may also levy a Sales and Use tax. Visit your state and local tax authority's web sites for more details.

2.3.2. European VAT

The mechanics of VAT are such that it is a tax on the "value added" during each stage of production of a product or service. As such, if you are a business, you typically charge VAT to your customers, but you can also claim back the VAT you paid for the materials and services used in the production of your product or service. The difference between what you collect in VAT on behalf of the taxman and what you claim back in VAT is then the tax on the "value added" by your company in the production chain that ultimately leads to a final consumer.

Even if you have paid VAT on Skype services, you may be somewhat surprised to find that the credit remaining in your account and the costs of your calls are listed without VAT. So, if you were to sum your call costs and add your remaining credit, this would be less than your total payments, the difference being the VAT you paid.

You can find a complete list of SkypeOut calling rates (with and without VAT, and quoted in a currency of your choice using online conversion rates) at http://www.skype.com/products/skypeout/rates/all_rates.html.

2.3.2.1. Claim back VAT.

If you are a business, your telephone bill is usually an expense that qualifies for VAT-exempt or VAT-claimback status. As such, you may be able to claim back any VAT that Skype charged when you bought Skype credits and any other services. At the time of this writing, Skype did not offer the option of VAT exemption for qualifying entities.

If your billing address is within the EU, Skype will automatically charge you VAT. Now, the process by which you claim VAT back (or get a VAT credit) from your member country tax authority might be tortuous and painful (you will, after all, be dealing with your government's bureaucracy), but there is usually a well-defined process by which you can claim your VAT back.

To smooth the VAT claim-back process you can obtain a VAT-compliant invoice by going to your Skype account page and printing a copy, or by downloading it as a .csv (comma-separated value) file for import into a spreadsheet or into your accounting system. To obtain your call history as a .csv file, from Skype select Tools Go to My Account Page, sign in and click on Call List, and then click on Export.

At the time of this writing, the 25 EU member states were: Austria, Belgium, Cyprus (the Greek part), the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom of Great Britain and Northern Ireland. Skype is a Luxembourg company and so charges the Luxembourg VAT rate, currently 15%. This rate is below that of most, but not all, EU localities (the Canary Islands, Madeira, the UK Channel islands, and the Isle of Man all have a lower rate).

As with all taxes, VAT is a veritable minefield of complexity. A useful jumping-off point for beginning your journey into this complexity is the document "VAT in the European Community," which you can find at http://europa.eu.int/comm/taxation_customs/resources/documents/vat_ec_lu-en.pdf.