All posts by admin

The problem with “EU-Friendly”

Right up front, I want all of you to know that, on the D&D alignment chart, I’m firmly Lawful. I always file my taxes on time, and I never suggest splitting the check if I’m the only one who had a drink with dinner. I mention that because, fundamentally, that’s why I haven’t been able to get on-board with any “EU-Friendly” scheme that’s been presented to me so far. I live in hope that someone will create one that’s not perpetrating a fraud, but I’ve yet to see one.

Fraud? Really? Kind of a harsh, I know. Let me walk you through it.

When a customer in one country places an order with a supplier in another country, they are entering into a sales contract, upon which they will owe customs duties and sometimes value added tax (VAT), depending on their home country’s specific laws. Most countries have a threshhold below which they don’t charge, on the basis of paperwork reduction. There are usually different rates for different types of goods, as well. If you do something, after the fact, to obscure the sales contract between the buyer and seller, in order to evade the duties and taxes set out by a country’s government? Well, at a minimum it’s tax evasion, but it really looks like fraud to me, since it’s being done with intent.

I’m going to run through a couple examples, to show the export/import process in a little more detail.

Case A: An individual buyer in Europe mail-orders a $40 product from a publisher in the US, and pays $25 in shipping and handling charges.

Correct course of action: The publisher packs up the box, and ships it to the customer, with a declaration attached to it that the shipment is “merchandise” with a value of $40. The customer pays whatever duties and/or VAT is required by their home country.

Incorrect course of action: The publisher packs up the box and declares that it is a “gift”, or that it has a value of less than $40.  (Note that it would be equally incorrect to mark the value as $65, since the extra $25 was paid for a service, not for the goods themselves). The customer fails to pay required duties or taxes.

Case B: A wholesaler in Europe orders 100 of the same $40 MSRP item from the US publisher, but at a 60% discount.

Correct course of action: The publisher declares that they are selling the wholesaler $1600 worth of merchandise. The wholesaler pays duties and taxes based on the discounted price. It is important to note that they are importing goods at wholesale, which they will then sell at a profit, thereby creating taxable income in their home country.

Incorrect course of action: The publisher declares the merchandise at something other than the $1600 paid for it, or declares it as a different type of goods than it is, in order to fall into a different customs category. The wholesaler fails to pay required import duties or taxes.

Note that the specific rules and rates are dependent on the policies of the importer’s home country. Some countries have very high duties to discourage the import of certain types of goods. Bulk importers generally use customs agents, who are versed in preparing all of the paperwork correctly, to minimize both their duties, and their risk of falling afoul of the local customs authorities.

Now, let’s look at the “EU-Friendly” case, where the publisher uses one of the “cost-saving” services I’ve been pitched, and what’s wrong with it.

Case C: Publisher enters into sales contracts with dozens or hundreds of individuals, located in multiple countries within the Eurozone. EU-Friendly-Provider (EFP) “takes possession” of the necessary goods at the US manufacturer in a bulk shipment, importing them into the EU at cost value. EFP then ships individual packages to EU customers from within the EU. EFP then bills the Publisher for: bulk shipment freight, import duty at cost, package handling and local postage for individual shipments.

Notice the fraud?

The EFP is fraudulently pretending to be the publisher of the goods, and the holder of the sales contract with the individual EU customers. If that were truly the case, they would be entitled to import the goods at cost, because all of the profit would go to them, and as an EU company, they would be paying taxes to someone in Europe for that income, as well as boosting the local economy by reinvesting that profit, etc. etc. By stating on the customs forms that they are the purchaser of the goods at factory cost, they are defrauding the customs and taxation authorities in Europe. The EFP is *not* the purchaser of the goods, they’re just a pass-through service provider. For the correct amount of duties to be paid, the EFP’s import value should probably be calculated as the full retail plus shipping and handling paid by the individual customers whose sales contracts the EFP is taking on, less the amount that they will invoice the US company for the fulfillment service.  Which might turn out not to save anyone much money…

And just an aside on another “fraud” angle to this whole thing. I wonder what will happen to a publisher who pays an EFP for their service, and then finds out that they are subject to penalties? Tax-dodging is not a small matter. Will the EFP step up and absorb any judgements and fees, or leave the publisher holding the bag? Does the service they provide include guaranteeing the legality of what they’re doing?

Bottom line: you will see me endorsing an “EU-friendly” solution when I see one of two things (which I find unlikely):

1) An EFP who promises to completely, transparently, accurately declare the value of the goods they are bringing into the EU, assuring that all customs authorities will get their fair payment for the retail purchases made by EU customers from a US company. And this might still be a bit sloppy for my tastes, since the individual customers are scattered over multiple countries, and the EFP will probably only do business in one.

2) A new tax treaty between the US and EU, eliminating customs and VAT for trans-shipped mail-order fulfillment of US manufactured goods.

In the meantime, I recommend that Kickstarter creators stay on the right side of the law. I’m guessing that some EFPs are just ignorant of the law, or can’t do math. Others may just assume – and not without precedent – that they’re unlikely to get caught, since governments have bigger fish to fry than small operators bringing in a few dodgy shipments a year.

I welcome constructive suggestions.

The best I’ve heard so far is entering into a true partnership with a local company in Europe, and either having them publish an EU edition of the project, paying the original publisher a royalty on sales, or having the EU partner purchase a quantity of the US edition at wholesale and handle the local sales in Europe. Notice that in neither of these cases does the US company get to charge EU customers retail, arrange for a delivery service, and evade duties. The US company gets some benefit but the cost to the customer is directly related to how much of the profit of the transaction stays in the EU – which is exactly the concept behind import tariffs.

Thoughts about Kickstarter

People often ask me for advice when they’re considering using Kickstarter. I’m happy to oblige. I don’t think any of this information is “secret”. The reason someone should pay me real money to consult on their Kickstarter is so that I can provide personalized help that looks at their particular product, cost structure and marketing approach. With that in mind, here’s some general advice, followed by an example that digs into some of the math. It’s derived from correspondence I had with someone considering a book project, so that informs the general thrust of it.

My Advice

Should you do it? Don’t launch a Kickstarter until you are confident that you have engaged with at least some kind of network who will help you get the word out. It may be “free” to run a failed Kickstarter, but only if you don’t count the time, and indeed money, you have to put into promoting it – a decent video can make or break a campaign – and the favors you’ll be calling in, asking everyone you know to make posts on your behalf around the internet. That’s your social capital, don’t waste it!

Production Costs: Don’t guess. Find out how much it will cost to produce your product. If you’re making a book, printers will give you estimates, but you need to work out your desired format – they can’t do that for you. Decide what page size, page count, and range of quantities works for your project. For example, 1000 copies is the barest minimum for offset printing, and that’s going to look very expensive per unit, since most of the cost is press set-up. The unit cost will look much better with each 1000 additional copies you order. But, if you only need 1000 copies, don’t be fooled by that lower “unit cost”. You’re paying the for the press-run, up front, and you will only recoup costs when you actually sell the books! For small print runs, I advise looking into print-on-demand solutions. If you are only selling directly to retail customers, those can be very cost-effective.

Pricing: If you intend to sell your item to stores and distributors, you will have to do so at a large discount, plus you will be expected to absorb the cost of shipping. You’ll need to set your retail price high enough that you can make a profit on all of those sales.

In the comic and game industries:

  • Retail stores pay ~50% of the cover price (and you pay the shipping).
  • Distributors pay ~40% of the cover price (and you pay the shipping). Diamond Comics in particular require goods to only be sent via certain types of carrier, which are not the cheapest available.
  • In these industries, the rule of thumb is that your production costs must stay below 20% of your retail price to be viable, and 10%-15% is much safer.
Setting Your Goal: When it comes time to set the goal for your campaign, the math is far from simple. You need to raise enough that you still have something left over after:

~10% is kept by Kickstarter & Amazon payments
You’ve paid your production bills in full, including freight
You’ve paid for any premiums (stickers, t-shirts, etc.)
You’ve packed up and mailed all of the backer rewards
You’ve paid the income tax on the profit you made
You’ve paid any sales tax that your locality requires

Premiums:

  • Don’t underestimate the cost of producing them, especially in small quantities
  • Don’t underestimate the time needed to produce them, especially in large quantities
  • Don’t promise anything you don’t have a thought-out production plan for
  • If you are offering anything hand-crafted, ONLY include it in limited-quantity reward levels, so you don’t overcommit yourself
  • Don’t underestimate possible difficulties in shipping, handling and even customs, if you ship overseas.
  • There are much lower costs associated with printed matter vs. just about anything else
  • Don’t offer anything breakable, unless you’ve got a really big safety margin (Coffee mugs, I’m looking at you).

Stretch Goals: Be wary of what I call “campaign creep”. During a successful crowdfunding campaign, supporters will clamor for stretch goals. It’s wise to have a few additional pledge levels or minor products or projects planned, so that they can be announced to keep enthusiasm up. But often requests for “stretch goals” become requests for additional premiums to be provided to backers at no additional cost to them. In the heat of the moment, these requests may seem reasonable. While it’s true that -generally speaking- profit margin per customer will increase with scale, that margin can easily be wiped out, or reversed, by adding even seemingly simple new rewards. It is far too easy to underestimate the additional time, work, storage space and handling charges required for each new thing. It’s a slippery slope that can lead to “Death by Kickstarter”.

In summary: I don’t advise people to go onto Kickstarter until they have a reasonable expectation of success. If you have a sufficient number of loyal, excited followers, who express an interest in having your product, and their direct purchases would come close to covering the cost of your desired production run, then you’ve got a good launchpad. You have a good shot at expanding your audience, and funding a profitable product.

So What Does This Wind Up Looking Like?

I’ve written up an example Kickstarter, showing the cash and profit results for someone planning a hypothetical $10,000 print run of small format art books. It’s all round numbers, for the sake of the example. Research the exact costs for your particular situation!

Doing the Math

An artist wishes to print 2000 books, which can be sourced for $5 a piece. They plan to sell some of them into retail channels afterwards. To make that feasible, they have set their retail price at $30. Basic cost research:

$10,000 to the printer (plus $500 freight for 50 cases of 40 books – one partial pallet – delivered to the artist’s home)
$5 minimum shipping for each domestic backer (USPS printed matter only, mailed in padded envelopes).

Overseas backers would cost much more, and will be excluded from this example. In practice, the up-charge for international shipping should be calculated to cover something close to the worst-case scenario, since there is no way of predicting the mix of countries backers will live in.

Note that these costs do not include paying anyone to label, weigh, take packages to the post office, etc. We’re assuming that the quantity will be low enough for the artist to do this themselves. In assessing this, the artist should take all of that time into consideration when deciding whether the project is worthwhile. Just because something does not require cash does not make it free!

Let’s assume the artist asks for a minimum of $14,000 and makes it by a small margin, getting these quantities of backers:

20 people throw in $5, for no reward
50 people throw in $15 for a small premium (e.g. a pack of art postcards)
300 people throw in $30, for the book at “retail” (but shipping is included)
100 people throw in $50, for a book plus two premiums

The raw pledges come to $14,850 which goes to the following places:
KS and Amazon keep $1485
Printing comes to $10,500
Postage and supplies comes to $2,350

Premiums cost around $150 (postcards, cheap)

$14,850 – $14,485 = $365 cash on hand (assuming the artist had some other way to pay their bills). For tax purposes, they are showing a profit of $8365. They’ve sold 400 books, so the Cost of Goods on the book sales came to $2000. The other $8000 (1600 books) becomes inventory – an asset. The cost of those goods is only recorded as they are sold (or given away in promotions, or – heaven forbid – thrown out as unsaleable).

Now let’s look at what happens if we double the the numbers of backers across the board. In that scenario, the total pledges come to $29,700

KS and Amazon keep $2970
Printing still only comes to $10,500
Postage and supplies comes to $4700
Premiums cost around $200 (postcards – still cheap!)

In this case, the artist will have $11,330 cash on hand afterwards, and show a profit for tax purposes of $17,330. Afterwards, they hold an inventory of 1200 books, worth $6000 as an asset.

For this artist, it looks like a $10,000 book print run translates into the need for to raise more than $20,000 in raw Kickstarter support, if they want to have any compensation for their own work, and to have a decent amount of cash on hand when the dust clears. They should set their minimum requirement on that basis, unless they have other sources of funds in starting up their publishing business. And they will need to do one other set of numbers, to check for safety: what happens if their book is a runaway hit? The unit cost of the books will be reduced, but the moment the artist doesn’t have room in their home to receive and process the mailing, they will encounter both storage and fulfillment costs. Also, they may be tempted to invest more of the excess cash into inventory (i.e. print more books, because it is so “popular”), but if they do not already have the structure in place to handle selling to stores and distribution once the kickstarter is done, that might not be wise. The extra books may just languish.

Please feel free to contact me, and ask more questions!

 

Handling Licensing Requests

A friend recently asked me for advice on handling requests from people who either want him to participate in a project, or want to license his IP for their projects. Here’s a generalized version of my advice.

The first step is to think about what categories the proposed projects fall into, and assess each, looking at these factors:

1) Is this a category of thing that appeals to you, and hopefully a significant portion of your fans?

2) Have you recently done something else in this category, or have something pending or ongoing in this category, and therefore don’t need another one that is so similar?

3) Are the people approaching you capable professionals, with experience in that category, who can do justice to the project?

4) Will the project associate you with other brands/products, and are they ones you want to be associated with?

If a project passes this initial “is it generally a good idea” bar, then you get to dive into a further assessment:

1) Does the project provide enough financial or promotional benefit to be a good use of your time? (If a project is tiny, it had better be a tiny time-commitment, too!)

2) Is the financial proposal fair to both parties? (You want everyone involved to be getting the proper incentives).

If you’ve gotten that far, and still want to say “yes”, there you go! Make sure to get everything written down, and signed, and then you’ll have less trouble down the road.

On the other hand, sometimes you really need to turn someone down. And that will eat up not just some of your time, but also emotional energy figuring out how to communicate with them. It could also cost you some good will, if they get bent out of shape that you didn’t jump into their project. But you can’t let that sway you into doing a project if it’s not a good fit.

It can be useful to have someone – an agent or business manager – who can say “no” for you, so you (the talent) aren’t the one turning people down. You want to have the luxury of being nice, and saying, “gosh, we’ll look at that, but my business manager knows what my schedule is, and what other projects and contractual obligations I have, so I can’t just say yes”. Then you pass the person along to your representative, and you’re not the one who rejected them. People may start approaching your agent instead of you. Depending on how you set up the relationship there, you can either have them pass everything through to you for approvals, or give them guidelines, and let them screen out the people who are definitely not a good fit without taking up any of your time.

If you can’t rope somebody else into being your filter or hatchet person, you can still have responses ready to hand, starting with a simple, “No, but thank you for asking.” If you must give more detail, stick with “My schedule is quite full, so I wouldn’t be able to put in the time this would require” or “I’m committed to a number of projects already, and some of them would overlap too closely with this”. There’s never a reason to say, “oh lord, your thing looks awful” or “it sounds like you’re expecting me to do all the work”. 😉

I have learned to stay as straightforward as possible when saying “no”. If you give someone a detailed reason, that can push them into sales mode, where they will try to “answer your objections”. That in turn can lead to protracted back-and-forth, and more potential for people’s feelings to get hurt. Keep it simple and firm, and make sure you’re respecting your own time.