Amazon faces class-action lawsuit over eBook pricing

[JSWolf]

https://www.bbc.co.uk/news/explainers-53334098

Are companies passing on the VAT cut to customers?

The Treasury estimates households could save £160 a year on average, but not all firms will pass on the benefit.

Many companies are expected to use the windfall to shore up finances hit by the lockdown, rather than cut prices.

For example, Malcolm Bell, chief executive of Visit Britain, said the chancellor's move was to support business, not help holidaymakers.

And many attractions such as museums, parks and zoos, might also not pass on the reduction.

However, Starbucks has said it will pass on the full 15% discount on coffee served in company-operated stores.

McDonald's has recommended that its franchisees cut prices on an array of products, and pub chain Wetherspoon said it would reduce prices on meals, coffee and soft drinks.

[DuckieTigger]

Originally Posted by JSWolf

https://www.bbc.co.uk/news/explainers-53334098

Good, you finally understand how things work. Sales tax in the US is added to the finished product. Raw materials are usually tax exempt even if the finished product has a sales tax. The VAT system does not tax based on finished product sales price, but merely on the value added in each step of manufacturing including the final sale to the consumer. Value added is basically the same as labor costs or profit margin. 20% VAT as it was in the UK does not mean that Amazon has to pay 20% in taxes, they only pay 20% on their profit. Or rather they did. It is more correct to compare VAT to income tax rather than sales tax.

The UK reduced VAT, or income tax on the producer chain. It is meant to increase the profit margin in a struggling economy due to the pandemic. Even if they reduce the prices, it makes no difference that they are now all of a sudden have a higher profit margin.

[darryl]

Imagine there is no VAT on e-books and the price charged is £3.32. The seller collects £3.32 and is not required to pay anything to the Government by way of VAT. Then the Government introduces a VAT of 20% on e-books. Vat type legislation often requires that the price quoted to the buyer is the price inclusive of VAT. Governments as a general rule discourage price tags highlighting the amount of VAT on a transaction, for obvious reasons. They would much rather consumers see one inclusive price, though of course the amount of VAT is always readily ascertainable if not stated.

The seller then has the obligation to pay to the Government VAT of 20% of the sale price. If the price remains at £3.32 the seller can keep only $2.77 after paying to the Government VAT of £0.55. Most sellers of course choose to add the VAT to the price they had already set, though it is usually perfectly open to them to partially or completely absorb the VAT themselves. If sellers are actually working out their prices on a cost plus type basis with a margin, VAT is added to what the price would otherwise have been to achieve the effective margin. If sellers are simply using their costs to set the lower boundaries of their pricing but are in fact setting pricing by other means, for example their competitors prices, they will still seek to recover any amount of VAT they must pay. In a very competitive market some may choose to absorb some or all of the VAT.

When VAT is removed or reduced, this will often not be passed on to buyers. As has been said, the precedent has been established that consumers are prepared to pay £3.99 for the e-book. It's hardly surprising that sellers often choose not to pass the VAT savings along in the form of lower prices. Yes, they could in this case reduce the price to £3.32 and make the same profit, as some seem to have done. Only in a very competitive market would I expect most sellers to refuse such a windfall. And Big Publishing e-books are not a very price competitive market.

[DuckieTigger]

Originally Posted by darryl

The seller then has the obligation to pay to the Government VAT of 20% of the sale price. If the price remains at £3.32 the seller can keep only $2.77 after paying to the Government VAT of £0.55.

That is not how I understand it to work. The 20% of the sales price is not covered by the last seller in the chain, but divided among everybody, including all middlemen. It ends up 20% of the product price, but everybody pays a portion of that for their own profits.

[darryl]

Ha

Originally Posted by DuckieTigger

That is not how I understand it to work. The 20% of the sales price is not covered by the last seller in the chain, but divided among everybody, including all middlemen. It ends up 20% of the product price, but everybody pays a portion of that for their own profits.

Nice to hear from you Duckie. I'm no expert on the UK Vat but most taxes of this kind work by allowing credit to earlier sellers in the chain for the VAT they have paid. The final seller is indeed responsible for payment of the VAT which is usually passed on to the final purchaser. I'm glad to be corrected, but a system such as you describe would I suspect be complicated and unnecessarily onerous, with the same result. Happy to be corrected if I have it wrong.

[DNSB]

Originally Posted by DuckieTigger

That is not how I understand it to work. The 20% of the sales price is not covered by the last seller in the chain, but divided among everybody, including all middlemen. It ends up 20% of the product price, but everybody pays a portion of that for their own profits.

My understanding was that every link in the chain up to the final consumer both pays and collects VAT. So the retailer would either pay or be reimbursed the difference between the VAT they paid and the VAT they collected.

[paulsalter]

Originally Posted by DNSB

@paulsalter: Did you bother to read the entire post before replying? Play special attention to the bolded sections in the quotes above.

I did yes, the product cost is irrelevant for the scenario we are talking about
Using the figures you show as they are easier to work with

Retailer sets the price at £100, this is based upon all the costs of the product (including the VAT)
I pay £100 when i buy this
With VAT at 20%, the retailer will pay the government £20

Now lets say that the VAT rate drops down to 10%
There is no automatic reduction of the price this product is sold to the customer, though the Retailer can increase to take this into account
So unless the retailer changes things, this product is still selling at £100
I pay the retailer £100
With VAT now at 10%, the retailer will pay the government £10

[JSWolf]

Originally Posted by paulsalter

I did yes, the product cost is irrelevant for the scenario we are talking about
Using the figures you show as they are easier to work with

Retailer sets the price at £100, this is based upon all the costs of the product (including the VAT)
I pay £100 when i buy this
With VAT at 20%, the retailer will pay the government £20

Now lets say that the VAT rate drops down to 10%
There is no automatic reduction of the price this product is sold to the customer, though the Retailer can increase to take this into account
So unless the retailer changes things, this product is still selling at £100
I pay the retailer £100
With VAT now at 10%, the retailer will pay the government £10

And for every sale, there will be a £10 profit. The VAT savings should be passed on to the consumer. If you were looking at two eBooks you want to read and one was priced at £3.99 and the other priced at £3.32 and you could only buy one of them, you would buy the one at £3.32 given that the desire to read these is the same.

So sales of the £3.32 eBook increase while sales of the £3.99 eBook decrease.

[Pajamaman]

Originally Posted by paulsalter

Why would you expect an outcry or people to notice?

As I have said multiple times, I expect at least some comment from the mainstream press. At least some comment. What do we get? Nada. Can you imagine the uproar if Amazon did it?

[Pajamaman]

Originally Posted by paulsalter

The publisher has not raised prices, they have stayed the same

No, that is incorrect. The publishers have increased their prices. The government dropped the price, and the publishers then increased the price to absorb the savings implemented by the government.

[Pajamaman]

Originally Posted by DiapDealer

Has it ever been newsworthy that a company chose not to pass on their new savings to customers? I think it would be more noteworthy if they did.

I am sure it would extremely news-worthy if Amazon did it. UK publishing corporations just ripped off consumers for 20%, and it appears that no major media outlet even mentioned it.

[paulsalter]

Originally Posted by Pajamaman

No, that is incorrect. The publishers have increased the price. The government dropped the price, and the publishers then increased the price to absorb the savings implemented by the government.

The government dropped the amount of VAT the publisher pays
This has no effect on the sales price

I agree the price should be reduced, but it's not an automatic thing

[paulsalter]

Originally Posted by JSWolf

And for every sale, there will be a £10 profit. The VAT savings should be passed on to the consumer. If you were looking at two eBooks you want to read and one was priced at £3.99 and the other priced at £3.32 and you could only buy one of them, you would buy the one at £3.32 given that the desire to read these is the same.

So sales of the £3.32 eBook increase while sales of the £3.99 eBook decrease.

I agree, it should be passed on

Depends if sales of the £3.99 book are decreasing, as far as the customer is concerned though, the price is the same as it has been, nothings changed

[DiapDealer]

Originally Posted by paulsalter

I agree the price should be reduced, but it's not an automatic thing

Yep. Some did, some didn't. Same as it ever was. That's why it's hardly newsworthy either way. Was Amazon given widespread kudos for lowering the price of its ebooks to reflect removal of VAT? Nope. Not newsworthy. Not really newsworthy the other way, either. It's just business.

[Pajamaman]

Originally Posted by paulsalter

The government dropped the amount of VAT the publisher pays
This has no effect on the sales price

I agree the price should be reduced, but it's not an automatic thing

I'm sure the retail price change would be "automatic" if the government increased VAT.