Mobile games as a service commission – recover sales tax?

The sale of mobile games or even in-app sales of computer games via app stores constitutes a service commission under VAT law. This was decided by the Hamburg Fiscal Court, thus contradicting the responsible tax office.

The problem is similar to the circumstances I presented in this articleabout selling on Fiverr.

The decision leads to the fact that game developers should check exactly and retroactively (see below) whether payments from Appstore are subject to VAT in Germany or not! This could be a matter of significant tax payments for many providers (not only of games)!

The court ruled:

1. the principles of the so-called store jurisprudence are also applicable to so-called in-app purchases from games on mobile devices (especially smartphones).

2.If the in-app sales are made to the company defined in § 3 para. USTG Section 3 (11) UStG (Service Commission), the place of performance shall be determined in accordance with Section 3a (11) UStG. USTG § 3A paragraph 2 UStG.

Facts

The game developer (here plaintiff) develops and distributes games for smartphones, tablets etc.. Among other things, it uses an app store for distribution. As usual, users of mobile devices could download game apps exclusively via the Store. In this case, too, the app required for this was already installed on the mobile device ex works. In addition, there was the option of accessing the Appstore via an Internet browser.

In the years in dispute, the GTCs contained the provision that each purchase of content (such as apps, text, software for mobile devices) would result in a further contract in addition to the contract with the app store provider. In the event of defects or functional problems, it was stipulated that the user should contact the developer of the app, who would be the contractual partner in this case (Section 6 (11) sentence 3). In the event of changes to the terms of use, according to sec. 6 para. 16 provided that the new terms of use would have to be accepted before the next content purchase.

The Appstore also had its own refund policy in the years in dispute. After that, within 48 hours of purchase, users could contact – in addition to app developers – storen providers to cancel a purchase and request a refund, which was granted under certain conditions.

The appstore contract with the plaintiff contained customary clauses to the effect that the developer was the seller of the products offered via the appstore, that specified technical and design standards had to be complied with, and so on.

In the case of the transactions at issue here, the purchase was processed via the Appstore and the payment method stored there.

On Jan. 29, 2016, the plaintiff filed corrected sales tax returns for the years 2012 through 2014 and requested a refund because, in its view, no sales tax would be due to it for the app store payments. It explained that a service commission within the meaning of § 3 par. USTG § 3 paragraph 11 UStG is present. It, the plaintiff, had provided a service to the appstore operator, which in turn was the service provider vis-à-vis the end customers. The plaintiff therefore reduced the tax base of the taxable output sales at 19% by the proceeds from in-app purchases made by end customers from the European Union via the Appstore. Furthermore, it corrected the tax base and the sales tax for input services pursuant to Section 13b para. USTG § 13B (1) UStG as well as the corresponding input tax amounts by the originally assumed brokerage services of the provider. In support of its claim, the plaintiff relied on the so-called store case law of the BFH, which was also applicable to other services provided via the Internet. In the case of chargeable services obtained via the Internet, the external relationship is ultimately essential. The app store provider is the service provider to the customer for VAT purposes. He operates the app store, performs the ordering process, and collects payment from customers. From the perspective of an average end customer, the Appstore thus sells the respective product purchased via the Store. This also applies to in-app purchases.

The tax office then conducted a special VAT audit of the plaintiff and, according to the report dated June 16, 2016, came to the conclusion that the app store was to be regarded merely as an intermediary. It is true that the respective purchase transaction took place via this platform. However, the customer had been made aware of the terms of use at each individual step of a download process. the Appstore had thus shown the end customer in an unambiguous manner for each purchase that sales had been made for a third party and that the latter had merely acted as the party authorized to collect the debt.

The tax office then issued amended VAT assessments for 2012 to 2014 on the basis of Section 164 AO, in which the changes declared by the plaintiff were not taken into account. The applicant filed objections to this on Aug. 25, 2016, which were rejected as unfounded in 2018.

The latter then filed a lawsuit, arguing that it did not owe sales tax for the in-app purchases in the taxable periods 2012 to 2014. The debtor of the sales tax is rather the operator of the app store or another party involved. This applies despite the terms of use, because they contradict the actual processing of the purchases concerned. It is true that the parties to an exchange of services are generally determined by the contractual relationships under the law of obligations. However, this would not apply if the contractual provisions contradicted the economic and business reality of the transaction. This was the case in the present case. The Appstore is so closely involved in the provision of services that its operator cannot act as an intermediary. In the tax periods at issue, a sales tax performance commission pursuant to Section 3 para. USTG § 3 paragraph 11 UStG existed. In this context, she, the plaintiff, had sold her in-app items to the app store. The latter had resold the products to the end customers. This is apparent both from the case law of the BFH and from considerations of European law.

The decision

The action is successful on the merits.

The court ruled that the contested VAT assessments for 2012 to 2014 were unlawful and should be amended.

Contrary to the view of the tax office, the basis of assessment of the contested VAT assessments 2012 to 2014 should be amended in such a way that the plaintiff’s revenues from the in-app purchases at issue and the commissions retained by the operator should be deducted. They do not constitute taxable sales of the plaintiff.

Taxability of domestic supplies or other services

Pursuant to § 1 para. USTG § 1 (1) No. USTG § 1 (1) No. 1 S. 1 UStG the supplies and other services which an entrepreneur carries out in Germany against payment as part of his business. Accordingly, the decisive factor for the taxation of a trader (Section 2 (1) of the VAT Act) as a tax debtor is whether and which supplies or other services are provided by him.

In-app sales are other services within the meaning of value added tax law

The plaintiff did not provide any services in Germany with regard to the in-app purchases at issue.

It provided another service by activating the electronic data in the user’s game app and in its game database, which enabled the end customer to obtain progress in the gameplay or other benefits in the game after an in-app purchase. Other services are services that are not deliveries (§ 3 paragraph 9 p. 1 UStG).

And further:

Deliveries of a trader are according to § 3 para. USTG § 3 paragraph 1 UStG Services by which he or on his behalf a third party enables the customer or on his behalf a third party to dispose of an object in his own name (provision of power of disposal). With the word “subject” in § 3 para. USTG § 3 (1) UStG covers both “things” (physical objects, § 90 BGB) and economic assets that are treated in trade as physical things, e.g. electric power, hydroelectric power and goodwill. The progress or other advantage in the game made possible electronically for the end customer by the plaintiff in the context of the in-app purchase was achieved by activating data in the user’s game app and on the plaintiff’s game database. These electronic data do not represent physical objects and are not treated as such in traffic. Rather, the service in question is another service rendered electronically within the meaning of Section 3a (1) of the German Civil Code. USTG § 3A (4) p. 2 No. USTG § 3A (4) No. 13 UStG in the relevant version (aF).

… which are provided electronically to an entrepreneur, …

These are electronically supplied services within the meaning of the VAT Directive that are supplied via the Internet or a similar electronic network, the supply of which, due to their nature, is essentially automated with minimal human involvement and would not be possible without information technology. According to the court, this includes the transfer of digital products in general, for example software and associated modifications or upgrades. The in-app purchase involves a change to the game data relating to the respective player, which takes place automatically via the Internet and thus constitutes another service provided electronically.

As a rule, other services are rendered at the place from which the entrepreneur conducts his business ( § 3a para.) Other services rendered to an entrepreneur for the entrepreneur’s business are taxable according to § 3a para. USTG § 3A, paragraph 2, sentence 1 UStG, however, exported at the place from which the recipient operates its business. Priority special regulations are not relevant here; in particular, § 3a para. USTG § 3A (4) and USTG § 3A (5) UStG aF for other services rendered by electronic means (§ 3a (4) USTG § 3A (4) S. 2 No. USTG § 3A (4) No. 13 UStG aF) did not apply because both C Ltd. and the end customers of the in-app purchases at issue had their registered office or place of residence in the Community territory.

… as in-app sales create a service commission to the operator

Now the court comes to the decisive and the most important point. In the present case, the other performance in dispute from the in-app purchases pursuant to G § 3 para. USTG § 3 (11) UStG were provided by way of a service commission by the plaintiff to the appstore operator and by the latter to the end customers. There is a so-called chain of performance, so that the place of performance for the disputed services of the plaintiff would not be in Germany.

Pursuant to Section 3 para. USTG § 3 paragraph 11 UStG, a service is deemed to be provided to and by an entrepreneur if the entrepreneur is involved in the provision of another service and acts on his own behalf in doing so. Although the wording is not identical, this provision is in line with Article 28 of the VAT Directive, according to which taxable persons who act in their own name but on behalf of third parties when supplying services are treated as if they had received and supplied these services themselves. By § 3 para. USTG § 3 paragraph 11 UStG, in deviation from civil law, the principal/commissionee in the case of the sale of services is treated as if he himself had performed a service to the agent/commissionee which corresponds in substance to a service performed by the commission agent to the third party. For VAT purposes, this negates the existing agency agreement between the principal and the commission agent under German law (Section 675 of the German Civil Code (BGB)) and, to this extent, deviates from the principle that the determination of the supplier and the recipient of the service is regularly determined by the legal relationships under civil law on which the transaction is based. The requirements of § 3 para. USTG § 3 paragraph 11 UStG are present here.

According to the court, the app store was involved in the other service (§ 3 paragraph 11 UStG) or in the provision of the service in the case of the in-app purchases at issue.

The end customer could only make the in-app purchases via the A and thus only receive the “virtual goods” in this way. To do so, he had to register with […] and accept its terms of use. The payment could only be made via […]who processed the payment via the payment method stored and thus also third-party providers (such as PayPal). After payment had been made, […] (automatically) transmitted an electronic message to the plaintiff, on the basis of which (automatically) the release of the purchased “virtual goods” was triggered. […] was more than just a payment processor. The […] game apps could only be downloaded via this platform. […] ensured a certain standard for the apps, because only those apps were allowed to be uploaded by developers that complied with the platform’s technical and design specifications. In addition, according to […]’s refund policy, the end customer could obtain a refund of the purchase price from […] A within 48 hours of purchase, without […] needing the developers’ consent to do so under its internal distribution agreements.

Prerequisite of acting on one’s own behalf given

The court also considered that the company was acting on its own behalf.

However, according to the court, such action does not result from § 45h para. TKG § 45H (4) TKG aF, which applied until December 31, 2014 and throughout the entire period in dispute (replaced by § 3 (11a) USTG as of January 1, 2015). Accordingly, services provided by other participating network service providers or service providers to end users via the connection of a subscriber network operator were deemed to be provided by the subscriber network operator in its own name and for the account of the participating network service provider or service provider for VAT purposes; the same applied to services provided by other participating network service providers or service providers to a participating network service provider that billed the subscriber network operator or another participating network service provider for these services in its own name and for the account of a third party.

The inapplicability of the first alternative of this provision already follows from the fact that C did not operate the respective telecommunications network in the form of mobile communications and was therefore not a subscriber network operator. The second alternative of this provision is also not relevant in the present case because it does not concern the billing of (third-party) services by a provider of network services to the subscriber network operator or another provider of network services. Network service providers within the meaning of this provision are so-called carrier network operators who operate a telecommunications network without subscriber lines.

But!

However, a trading app store in its own name would result from the overall circumstances, taking into account the so-called store case law of the BFH, which also applies to the provision of other services via the Internet:

Accordingly, in the context of determining the services and service relationships, it must be noted that the person who sells goods in his own store is generally to be regarded as a proprietary trader and not as an intermediary for VAT purposes. This is because the customer who buys goods in a store basically only wants to enter into business relations with the store owner. As a rule, he is not aware of any agreements between the store owner and a third party, according to which it is only supposed to be an intermediary activity. They generally won’t interest him either. The shopkeeper can be an intermediary only if direct legal relations are established between the person from whom he obtains the goods and the buyer. The internal relationship of the shopkeeper to his contractual partner who provides goods or services is not decisive for the question of whether proprietary trading or intermediary transactions exist. What is essential is the external relationship, i.e. the appearance of the shopkeeper to the customer. Only if the shopkeeper clearly indicates before or at the time of the transaction that he is acting on behalf of another person, i.e., that he is acting in another person’s name and for another person’s account, and the customer, who has recognized this, expressly or tacitly agrees to this, can the shopkeeper’s capacity as an intermediary be recognized for VAT purposes.

The court now applies the principles to the case at hand

These principles also apply to the provision of other services, insofar as they are offered on the Internet. This is because the operator of an Internet site who offers paid services there is comparable to an entrepreneur who sells goods in his own store. Just as the latter is generally to be regarded as a proprietary trader for VAT purposes, the operator of an Internet site is to be treated as the party that has provided the chargeable services offered there. The customer who buys goods in a store basically wants to enter into business relations only with the store owner. The same applies to the user who accesses a chargeable service via the Internet. The external relationship, i.e. the appearance of the operator of an Internet site vis-à-vis the user, is also essential in the case of chargeable services obtained via the Internet. Only if the operator of an Internet site clearly indicates before or at the time of the transaction that he is acting on behalf of another person, i.e., that he is acting in another person’s name and for another person’s account, and the customer, who has recognized this, expressly or tacitly agrees to this, can his capacity as an intermediary be recognized for VAT purposes.

This would apply accordingly to Appstore services, which are also offered via the Internet. From the perspective of the average customer, the app store is equivalent to a retail store. In the years in dispute, products in the form of music, apps, texts or videos were also offered for sale there, whereby the embedding of the products in the A interface created the expectation in the average customer that the Appstore was, in principle, the contractual partner and seller of the products. This also resulted from the fact that the customer first had to register with the app store and accept its terms of use.

The court emphasized:

Even if the average customer had read and understood the terms of use, which is not necessarily the case, it was made clear to him that it depended on the product purchased with whom he concluded an additional contract. In addition, the exact content of the contract remained open; in particular, the terms of use did not make it sufficiently clear that the other contracting party was to be the seller of the products.

The above-mentioned principles should therefore also be applied to the in-app purchases at issue. The purchases would indeed be offered from within the game and the game interface would be displayed in the background during the purchase process. Nevertheless, the customer would be virtually led, as it were, into the app store by the representations in the pop-up windows for carrying out the purchase. In the windows, the purchase was made under the dominantly displayed Appstore logo. The respective game developer was not mentioned. Reference was made to the app store’s terms of use and refund policy. The Appstore informed that the payment was successful. The customer thus had to assume that the purchase was made in the Appstore.

In the consequences, the court ruled that the Appstore had not acted sufficiently clearly in the name of another party in the in-app purchases at issue here, so that it would have to be assumed that it was acting in its own name in accordance with the principles set out above.

Due to the existence of a service commission pursuant to § 3 para. USTG § 3 (11) UStG, the app store of the plaintiff did not provide any intermediary services in Germany within the scope of the in-app purchases at issue, for which the plaintiff is liable pursuant to § 3a (11) UStG. USTG § 3A paragraph 2 UStG iVm § USTG § 13b para. USTG § 13B para. 1, para. USTG § 13B para. 5 p. 1 UStG would be the tax debtor, which is why the latter had correctly reduced its VAT liability.

The ruling has been appealed, so the BFH is expected to rule on these issues soon.

A little more information on the current legal situation

Although the ruling is actually based on the old legal situation, the court argues with good arguments in the present ruling that the end customer revenue is attributable to the app store operator. As always, however, the opposite opinion is not completely unjustifiable, but it seems to fade into the background.

This is probably also true , as today’s legal situation is even clearer. See also this article. With effect from 1.1.2015, Germany introduced a new regulation in § 3 para. UStG § 3 para. 11a UStG, according to whicha service commission is generallydeemed to apply to all end customer sales via platforms such asapp stores. § Section 3 para. USTG Section 3 (11a) Sentence 1 VAT Act deems a service commission if an entrepreneur is involved in the provision of another service that is provided via a telecommunications network, an interface or a portal. Pursuant to Section 3 (11a) sentences 2 to 3 of the German Turnover Tax Act (UStG), this is only not to be assumed if the supplier of this other service is expressly named by the entrepreneur as the service provider and this is clearly expressed in the contractual agreements between the parties. This would be the case, for example, if all invoices explicitly named the service and the performing contractor. However, again, it remains a service commission if the interposed contractor authorizes the settlement to the service recipient. This is probably the case if the app store decisively influences the billing towards the service recipient, for example, has an influence on the timing of payments and the actual debiting of the customer’s account! In accordance with the explanatory memorandum to the law, this should always be fulfilled in the current designs of app stores, as they authorize customer payments. Further requirements, such as the contractual agreements or acting on one’s own behalf, are then already irrelevant!

Result

The ruling could be a milestone for game developers, but also providers of other apps, and should be thoroughly discussed with legal advisors. A lot of money can possibly be saved here. You are welcome to contact me at any time via e-mail.

Author: Marian Härtel

Marian Härtel ist Rechtsanwalt und Fachanwalt für IT-Recht mit einer über 25-jährigen Erfahrung als Unternehmer und Berater in den Bereichen Games, E-Sport, Blockchain, SaaS und Künstliche Intelligenz. Seine Beratungsschwerpunkte umfassen neben dem IT-Recht insbesondere das Urheberrecht, Medienrecht sowie Wettbewerbsrecht. Er betreut schwerpunktmäßig Start-ups, Agenturen und Influencer, die er in strategischen Fragen, komplexen Vertragsangelegenheiten sowie bei Investitionsprojekten begleitet. Dabei zeichnet sich seine Beratung durch einen interdisziplinären Ansatz aus, der juristische Expertise und langjährige unternehmerische Erfahrung miteinander verbindet. Ziel seiner Tätigkeit ist stets, Mandanten praxisorientierte Lösungen anzubieten und rechtlich fundierte Unterstützung bei der Umsetzung innovativer Geschäftsmodelle zu gewährleisten.