Final summary on tax matters

There’s some good news today: Linden Lab are clarifying the process for filing form W8-BEN for non-US residents so there should be less confusion about the place!

My account has now been cleared for withdrawals and LL have not withheld any US tax.

I’ll summarise what we know currently:

You do not need to obtain an EIN or ITIN for the form W8-BEN. You just put in your territory’s local taxpayer identity code – in the case of the UK this is your National Insurance number.

If you’re not sure what number you need to provide try looking up your country on the National Identification Numbers page on Wikipedia.

So to clear your account status for withdrawals again you just need to fill out the updated W8-BEN form and upload scans of your identity documents on the support case LL open for you. If your non-US ID is accepted then it looks like LL will not be withholding any US tax.

 

Everything for the rest of this post is conjecture and may not be necessary ever.

Other US based online marketplaces like Amazon Direct Publishing also require non-US citizens to file a W8-BEN but in their case you need an ITIN or EIN to avoid paying 30% US tax. LL probably have good reasons for not doing it this way but the fact that they are the one exception makes me a little nervous.

If things should change in the future then you will need either an ITIN or an EIN. The IRS has recently been gradually increasing the difficulty of getting an ITIN until it’s almost impossible to obtain one (in the past year they have tightened the criteria for accepting identification documents to comic levels and have made proving you need an ITIN much more difficult) . I would not be surprised if it becomes harder to be assigned an EIN soon, too.

Right now an EIN is easy to get – you can obtain one over the phone in about ten minutes (once you get off hold! See my previous post for details). My feelings are that getting an EIN now is a sensible hedge against future changes. You will need one in any case if you want to expand into any other US based online marketplaces. It may save you some hassle in future.

The plot thickens. Or possibly thins a little.

It’s been a busy evening.

I’ve had a response to my queries from the Lab. Their take on this is that I only need to provide my UK tax ID number (National Insurance Number) and ID documents. This is good, but still a little puzzling to me.

If you google around about form W8-BEN most of the references are about people trying to acquire ITINs or EINs so that the royalties from their self-published e-books won’t have US tax deducted from them. I had assumed (in the absence of any better information) that Linden Lab were requiring me to fill out the form for the same reason – which is why I’ve been running around trying to get an ITIN.

Why LL’s position on this is different from any of the e-book publishers is a matter of mystery at the moment. I hope they have the right of it because it’s a lot simpler their way than Amazon’s way.

I have, in any case, taken the time to get an EIN from the IRS. I was looking at this whole thing the wrong way when trying to deal with the IRS – I’m not an individual, I’m a business. Thinking this way seems to be a common mistake not just for dealing with Linden Lab but with e-book publishers and all manner of internet business platforms. Once I realised my mistake it was only a matter of a phone call to get hold of an EIN.

From the response I got from the Lab it seems like an EIN isn’t necessary at the moment but all the same I’m getting the warm fuzzies from having it just in case. Things may change – it’s certainly the case that if you are publishing e-books an EIN or ITIN is vital; it may be the case that the IRS will take a similar view of business in SL before long.

For reference for anyone else interested, the procedure for requesting an EIN is as follows:

  • Review form SS-4 – when you speak to an IRS operator you’ll pretty much be filling this form out over the phone. Make sure you have all the required information to hand. I’ll include a quick cheat-sheet here:
    1 : Figure out what kind of business you are. Whether it’s a limited liability company (UK Ltd etc) or something else be prepared to give them the proper name for the type of your business. In my case “UK Sole Trader” was acceptable.
    2 : In line 10 “Reason for applying” your answer should be “Compliance with IRS withholding regulations”
    3 : Know what to say when asked what kind of business you conduct. “Digital Media sales” was an acceptable answer for my company and I think it would describe a business operating in SL well enough.
  • Call the IRS on +1 267 941 1099 and select option 1 from the voice menu. If the number doesn’t answer keep calling back – they seem to get overloaded. Be prepared to spend a long time on hold, so Skype is a good option to save some money on call charges.
  • Tell them you want to request an EIN for a foreign company
  • The IRS operator will pretty much walk you through the questions from form SS-4 in order. Be prepared to spell out everything letter by letter, so it’s handy to have it all written down in advance.

At the end of all this the operator should submit your request and issue you with an EIN there and then. Paperwork confirming it will follow in the post.

There will also be some extra questions about the kind of business you will be transacting in the US – they’ll ask if you intend to employ any persons in the US and whether you will need to operate any heavy goods vehicles there (I was tempted by this, I must admit. I can’t drive a heavy goods vehicle, but if I could get the permission easily I’m totally prepared to go Mad Max on the US Highways!)

The procedure for obtaining an ITIN has, over time, become more and more onerous (to the point of impossibility now). I would not be surprised if the process for obtaining an EIN will become more difficult as well. Right now it looks like you can continue your business in SL without an EIN but I can’t help but feel that now is a good time to go and get one just in case. It’s relatively little effort and I think it offers some insurance against things changing for the worse in future.

In the end I wish LL had offered a little more guidance and help with their request for information. I wouldn’t have gone down this path of fencing with the IRS if the information request had just said “You don’t need an EIN or ITIN, just provide your own country’s tax payer reference (e.g. UK National Insurance etc)” or something similar. One sentence would have saved a lot of hassle – not just for me but for the other business owners who have contacted me since I began blogging about this, all of whom are having the same worries. I hope these blog entries will shed some light where there was none before.

Query to the Lab

[ For the thrilling conclusion to this tale, and the solution to all the problems, see this post. Listen to that post and not to all the mistakes I made before it! ]

I’ve just raised the issue about proving I need an ITIN with Linden Lab on the support case they opened when they requested my details in the first place.

Since they have not replied to any of my previous queries yet I am going to keep posting each additional question I ask them on this blog and I will keep you all updated if they ever deign to reply.

My question reads:

Hello? Will anyone respond to my queries?

On further research I have learned that in order to obtain an ITIN I must have evidence that I need one to present to the IRS. Acceptable evidence would be an official letter from Linden Lab stating that an ITIN is required to make distributions to me during the current tax year (as in Exception 1(d) listed in the form W-7 notes http://www.irs.gov/pub/irs-pdf/iw7.pdf).

Is there any chance that Linden Lab would issue such a letter for me? I would be happy to cover administrative costs.

I cannot be the only person in this position – there must be hundreds, if not thousands, of people who run businesses in Second Life who will be affected by this. Are you going to turn your back on every non-US user of the platform?

Yet more on tax

For the thrilling conclusion to this tale, and the solution to all the problems, see this post. Listen to that post and not to all the mistakes I made before it! ]

Today I spoke with one of the Acceptance Agents mentioned in my previous post about obtaining an ITIN.

The news was not good. I had unfortunately overlooked another roadblock the IRS puts up – you have to convince them that you need an ITIN.

From where I’m sitting my need for one is pretty clear, but not so to the IRS. They will only issue an ITIN if you meet one of a specific set of exceptions. These are listed on page 7 of the Instructions for Form W-7 document. Selling virtual goods is not one of the exceptions – the list of exceptions is decidedly pre-21st century.

The most likely fit from their current list of exceptions is 1(d) – Individuals who are receiving distributions during the current tax year. In order to prove to the IRS that this reason is valid you must provide a signed letter or document from the “witholding agent” (Linden Lab, in our case).

It seems unlikely that LL will provide these letters. They won’t even answer my most basic questions at this point.

So, we reach an impasse. I will contact LL about getting a letter to submit with form W-7 to obtain an ITIN, but I doubt very much that they will help. At this point an ITIN becomes basically unobtainable for non-US citizens who run businesses in SL.

It may be possible to wait a year, pay 30% tax on everything, then file a US tax return asking for the money to be refunded. The need to submit a US tax return is acceptable evidence that you need an ITIN, but you do have to take the 30% hit for a whole year.

This assumes that LL will allow you to cash out at all – still no word on that, by the way. I have asked but the only response is silence.

More on Tax

For the thrilling conclusion to this tale, and the solution to all the problems, see this post. Listen to that post and not to all the mistakes I made before it! ]

In my last post I mentioned how new rules for tax reporting in the US have prevented me from withdrawing money from Second Life. This post is a quick update on how things are going (or aren’t going, as the case may be).

So far I’ve had no reply from Linden Lab to any of my queries, so that’s all up in the air, but I’ve been doing my own research into the process and I’ll be documenting the steps I’m taking in the hope it will make things easier for anyone else who has to follow in my footsteps to keep making a crust in SL.

Linden Lab is requesting that all non-US nationals complete IRS form W8-BEN in order to withdraw money. This form, by itself, isn’t a big problem to fill out but the devil is in the details. The form seems to require something called an ITIN (Individual Taxpayer Identification Number). This is something you have to apply to the IRS for using form W-7.

So far, so bad – I can’t even properly complete the form LL wants before going through a whole other process with the IRS. If you Google around a bit for people who are trying to obtain an ITIN you’ll find a lot (a lot) of misery and despair as people try to comply with the IRS’s extremely strict regulations for accepting identity documents.

Your options for satisfying the IRS as to your identity are as follows:

  1. Attend a US tax office in person and have certified copies made – not easy if you don’t live in the US
  2. Post all your original documents to Austin in Texas and pray that they won’t get lost on the way there or the way back
  3. Attend the US Embassy in your own country and have certified copies made by the IRS representatives there

I’m not mad keen on the idea of packaging up all my identity documentation and posting it across the Atlantic, not to see them for weeks or months. I do occasionally need them to identify myself in this country too!

Option 3 might also seem like a possibility, but then you run into the IRS’s customer service issues. I rang the US Embassy in London – despite my call being within their quoted hours the recorded message informed me that the office was shut. I gathered from the website and the recorded information on their phone system that what I would have to do is turn up at the embassy on either a Tuesday or Thursday morning, join a queue and hope that they had time to get around to me. If not I’d have to try again another day. Also I couldn’t bring any electronic devices with me (including a mobile phone) or the friendly Marines on the door would shoot me and then bill my family for the ammunition (which they’d also have to pay tax on because they don’t have ITINs either).

I may have made the shooting bit up, but it seems in keeping with the general level of helpfulness.

As it turns out making repeated day trips to London and back while leaving my phone behind isn’t an option at the moment – I’m looking after ill family members these days and, while making the trip once or even twice might be possible, I cannot be without my phone as well as away from the house.

I thought that things were pretty much over at this point until I happened on a page on the IRS website for their Acceptance Agent Program. Acceptance Agents are local firms who have been certified by the IRS to make certified copies of identity documents. They generally also offer assistance in obtaining an ITIN. I’m currently talking with one of the UK Acceptance Agents about applying for an ITIN and it seems likely that I will pursue this route to obtaining one. If you decide to follow in my footsteps then be aware that hiring the services of one of these firms will set you back several hundred pounds (or equivalent in your local currency). For me, it’s worth it, due to the amount of money outstanding on my account, but it may not be so for others.

So, to run down what I’ve learned so far:

  • If you are a non-US citizen and want to withdraw money from Second Life then Linden Lab will (likely) require you to file a W8-BEN form with them.
  • In order to fill out a W8-BEN you will need to acquire an ITIN from the IRS
  • ITINs are obtained by filling out form W-7 and submitting identity documentation to the IRS
  • The IRS is extremely picky about accepting identity documentation, so you will have to jump through some pretty narrow hoops to satisfy them. It will involve risking your valuable original documents to the international postal system or travelling to an embassy to queue hopefully for hours without even Angry Birds or a Kindle to pass the time.
  • Many countries have local Acceptance Agents who may be able to help you with advice or your application for a fee. Look up your local ones here on the IRS website.

It’s pretty clear that sorting this out is going to be an uphill battle. I have some advantages, though. I make enough money from SL that hiring professional help is an option for me – I’m not happy about it, but I’ll still come out ahead after paying their fees and I should only have to do it once to obtain my ITIN. I’ve also been used to wrangling with HM Revenue and Customs, having worked as a consultant and founded my own business in the past, so I’m no stranger to facing down tax men with a steely glare 😉

I’m afraid that these changes are going to make Second Life a difficult business platform for anyone outside the USA. What effect this will have on SL remains to be seen, but I wouldn’t be surprised if it clears out a lot of the smaller non-US based vendors, and probably a few of the larger ones too.

Just on another note, my previous post about this problem seemed to indicate that I would give up making things for SL entirely if I couldn’t get this sorted out. This isn’t the case. I would likely reduce the amount of stuff I make – I would find it difficult to justify the current amount of time I spend making things if it wasn’t a paying gig – but Kcreations would go on in some form. My current thinking is that I would redirect the profits from the business to charities that collect in SL – I could make L$ transfers in-world without worrying about IRS rules. I do already give to charities like Relay for Life in SL, but in this case I’d channel all the Kcreations money into it, or other worthy causes on the grid.