In the Spring of 2020 our factories in China (and pretty much everyone all over the world) were on a temporary lockdown with major restrictions of movement. By early summer most of these were lightened and most of our factories indicated to us they were back to work at full capacity. Then in July there was a surprise outbreak in China – not in the province our factories are located, however. This didn’t seem to directly affect things, luckily.
When I wrote a series of updates in the Summer regarding these events – particularly that there’s a new outbreak – there was quite a bit of flack I received with many comments on Kickstarter and in forums echoing some form of “other KS projects are no longer delayed with the lockdowns in China lifted, why are yours still going slowly?” A summary of my response to that continues to be: I don’t know. I am not privy to anything going on with any projects but ours.
So what gives? Factories have been at “full capacity” for months now. Why are things still delayed after the big “pause” in the Spring?
The answer isn’t complicated, but it’s not easy to condense into a single sentence. The first thing to know is that the delays created by a pause of four months don’t equate to simply “four months” once operations resume. I.e., things don’t simply pick up exactly where they left off the day right before the pause with no other effects on the schedule. Let me walk you through why that is. I’ll have to use some arbitrary numbers to explain, but all will make sense.
Let’s suppose that a factory who regularly makes big, plastics-heavy games takes, on average, 10 months to make each game. Suppose it can handle a capacity of 30 such projects being worked on in a given month. Based on this, if it’s typically at full capacity, we can determine that the factory can only take on 3 new projects in any given month; if it ever took on more than 3 in one month, it would be at 31 projects, an over-capacity.
If a factory is given a project when it’s at capacity, it builds a backlog, rather than turn clients or jobs away. For example, if in May there are four new projects from clients, and it doesn’t want to turn them away, it takes on three of them, and the fourth is begun in June instead, when the next set of three projects leaves. Note, I’ve never heard of a factory declining to take on a project no matter what is going on – even during the lockdowns (they just say they can’t start until later, naturally). I get quotes from a dozen factories, usually, for any project we look to do – all of them always want to take everything on.
So far so good?
Now, what if the factory is shut down for four months, say between March and June? A few things.
First, publishers still bring games to the factory as new projects, building up a backlog of new projects (if they normally take on 3 per month, there could be as many as 12 new projects waiting to start in July). Perhaps fewer than 12 were built up, because publishers were also less active during the pandemic. But I can tell you that Petersen Games sent several (smaller) projects to factories last summer – notably Cthulhu Wars: Duel which was manufactured in late Summer 2020, and the files were provided to the factory when the factory was essentially “paused.” Also, Evacuate, Potions and Profits, and Invasion of the Brood.
In July, once operations resume, the factory has to resume the thirty active projects it had before the lockdowns. But it also has a new backlog of 12. That means it has 42 projects, which is over capacity.
Now what? How are things prioritized? Obviously, “first in, first out” is a great policy in theory. But does it hold up in practice? Yes and no. It’s entirely possible that a particular mix of older and new projects makes the most efficient workflow for which of the 30 projects they’ll want to work on when operations resume. After all, games are not uniform. Suppose one of the new projects has only 5 molds and one of the old projects from before the pause has 20 molds. Those two projects could form an efficient combination together if the factory had 25 injection machines. Furthermore, how many miniatures are being made per mold? Perhaps the project with 5 molds has lots more minis per mold than the one with 20 molds, meaning those 5 injection machines will be used for longer. The factory will work out which project is best to fit in with those 20 machines after that project is done. And so forth.
My point is that “first in, first out” may be less efficient overall from the factory’s perspective which seeks to maximize its total output and total revenue it can get from clients. And that might mean, sometimes, that older projects are not “first” to resume even when operations resume.
While we have a good relationship with all the factories we use (and we use several), I am not privy to the ways they prioritize every project, and there’s only so much influence I can wield in very unusual circumstances such as this. I’m sure every client was simultaneously asking when things will be ready and how long the delay is, and if there’s can be put to the head of the line, etc. (And if any factory would be accepting more money to be earlier in line, that’s not something we can afford right now for any of our projects – and it feels ethically dubious to do so, anyway, which makes me averse to the idea).
One way I have helped influence things is by physically visiting the factory floor in China. By going to the factory, the management wants to show me their progress and give me very concrete details on everything. Because I’m there in person. I’ve seen this help move our projects along several times in the past – for a few years in a row I went at least twice per year. But I haven’t been to any factory since November 2019. This 14 month gap is the longest I’ve been away since I first went to a factory in 2014. This pandemic sucks for lots of reasons, and this is one of them.
Not everything of ours has been affected. For example, our Hastur Rising project did not experience very long of a pause (it did have a brief one). We sent the 3D files during the height of the pandemic, but because of the nature of the project – with one miniature – it was judged something that can basically continue with very little additional delays once normal operations resumed in the summer. This no doubt pushed back projects of other clients of that particular factory. Sorry guys!
My ultimate point is not to describe all the actual logistics of a factory – after all, I don’t mention Chinese New Year, a regular major pause in operations, and projects are of various sizes so having a uniform “30” capacity in a given month is totally bogus – as is the idea that only exactly 3 new projects can start, and 3 projects leave every month like clockwork. Clearly this all depends on each project individually.
My point is that there IS a capacity, and ever since the lockdown all factories we work with have been at overcapacity while seeking to get things back to normal. Remember, just because operations have “resumed” as long ago as six months doesn’t mean that everything was only delayed by the amount of time of the “pause” itself.
Oh, and we’re STILL sending new projects to them. I have all the files ready for the follow up to Cthulhu Wars: Duel, for example. And they say nothing on this can start until after Chinese New Year, even though that’s still weeks away.
Also Shipping. Major backlog there. Check out this piece from my friend, Tony Mastrangeli.
Although things may not be pretty, at least now you know. Which is half the battle, I’m told.
UPDATE January 19th:
Six temporary hospitals have already sprung up again – one built in 5 days – in response to the resurgence of Covid-19 in China.
The most frustrating part of waiting for a Kickstarter to be fulfilled is, well, the waiting. And for the types of games we typically put on Kickstarter – games with lots of plastic miniatures – the tooling process is the longest and most difficult to estimate part of that timeline.
Tooling Majorly Impacts Fulfillment Timelines
On average, projects requiring tooling have taken 10 months longer between the live Kickstarter and fulfillment, than projects without tooling. We’ve fulfilled 9 Kickstarters that required tooling. Those took an average of 22 months between live Kickstarter and the month when fulfillment was complete. That’s from a range of 12 months (Evil High Priest, which needed fewer than 10 small new sculpts) all the way to 33 months for The Gods War Kickstarter, which suffered from major tooling issues (and unrelated but major factory lawsuit issues). By contrast, the average of the 7 Kickstarters we’ve fulfilled that did not require tooling was only 12.7 months. And if you remove a massive outlier from that batch (our Sandy Petersen’s Cthulhu Mythos for Pathfinder which took 27 months due to non-repeatable problems), the non-tooling Kickstarters’ average drops to 10.33 months! That’s from a range of a mere 6 months between KS and fulfillment (8-Bit Attack, which admittedly benefited from the fact that we pre-printed the games before KS launch), and 15 months for Theomachy and Cthulhu Wars: VF (or 27 months if you count the outlier of the Pathfinder project).
Here’s the Short and Sweet version of these numbers:
In other words, tooling is a MAJOR reason for increasing the time needed to fulfill a project. And this extra time cannot merely be attributable to the fact that these projects also require mass produced (and assembled) plastics. After all, several projects in the “non-tooling” numbers above were games that had plastic pieces. Just not ones that needed tooling, since that was done for other projects. For example, the Cthulhu Wars: VF and the Harbinger Cthulhu Kickstarters both had plastic miniatures, but no tooling, and so were counted in the non-tooling averages!
An Overview of the entire Tooling Process (Or: Why does Tooling take so long?)
Tooling is the process by which the factory takes a 3D file that looks like this:
And turns it into a steel mold that fits the machines which create the plastic PVC miniature that looks like this:
The tooling for a project like this is a massive undertaking – it has many steps, but for a simple and small miniature (i.e., ones that you would basically never see in a Petersen Games game…), tooling can be relatively quick – even as short as 45 days. We have uniquely large and uniquely complex models, so the tooling process for us always takes a huge number of months, and the exact number of months is hard to predict at the outset.
This is OEM production. So, think of it like this – every miniature that is tooled is a new thing that has never been tooled before. And thus, knowing how long it will take is always a little unclear. The larger andmore complex (and ours are routinely both), the longer it takes on average. We are often impressed by the overall quality of some other miniature heavy publishers (CMON, Awaken Realms, etc.), and we always strive to even match their surface texture and overall quality. But it is actually rare for other publishers and games to match the size and technical complexity of our miniatures (i.e., the number of parts in a miniature and the unique challenges of tooling each one of ours).
With that in mind, it’s best to think of tooling as a process that crosses several key milestones, rather than something that takes X number of days or months.
Steps of the Tooling Process
3D file modifications
Red Wax 3D prints
Silicon Mold to create Resin Masters
Ceramic composite Positive
Molten Steel Negative
Testing, polishing, refining
Step 1: 3D File Modifications
Before tooling, and even before we launch a Kickstarter, we have created 3D models of all the miniatures. These already went through a lengthy process from concept to concept art to 3D sculpting. Now, we end up with 3D files that are enormous, typically a few hundred MB. These are much larger and more complex than a typical 3D printed doodad that is made nowadays (for example, Shapeways restricts uploads at 64MB, whereas it is rare for us to have any single 3D model file be less than 150MB).
But our sculptors, as excellent as they are, do not always know how to most efficiently prepare them for OEM manufacturing. So, our factory takes the models and suggests minor tweaks and revisions that will enable manufacturing (and the rest of tooling) to be easier, faster, cheaper, or more efficient in some way. I personally review every single change suggested (and our art director occasionally does as well, when I request it). Most of these changes are super minor, as described in this Kickstarter update. Occasionally they’ve been a little more significant, but not in a way that would change the overall aesthetics. Basically, what we show as preview renders on Kickstarter pages is basically what it’s going to look like.
It can take several weeks – up to a month or more – for the factory to review all the models, make suggestions, and for us to approve them. It depends on how busy the tooling factory is, and how many (and how complex) the models for the project are.
Step 2: Red Wax 3D Prints
This is very straightforward – after all modifications are approved by us, the factory makes a high quality 3D print of the model with a resolution of surface detail higher than the human eye can detect. This just takes a few days, and they’ll send me pics to show it’s complete and that nothing looks out of place.
Step 3: Silicon Mold for Resin Masters
At step 3, they go through the entire process for creating a mold that could be used for resin miniatures. Now, don’t get me wrong – it’s a slightly different process, and one that could only handle a few resin minis from the mold, rather than a more permanent one that can make more resin models. But the takeaway here is that, as ONE STEP of making a steel mold for plastic (PVC) miniatures, the factory makes a silicon mold suitable for a resin miniature! This step necessarily involves many steps, but essentially boils down to a simple silicon casting from which emerges a resin master. This step takes several days or a few weeks depending on how many miniatures there are.
Step 4: Disassembly Engineering
Step 4 is the longest step and the most difficult and complex. This is the step where a good (or great) tooling factory is distinguished from a lesser one. This “step” involves many intermediate steps wherein the resin masters are turned into PU (polyurethane) versions in alternating sequences of negative/positives and split apart into various pieces that will ultimately be glued together to make the final model. In short, this is where the parts of the molds are engineered and crafted.
We have super complex molds that can turn into dozens of pieces, and this is where that happens – where the miniature is carefully and cleverly carved up. A lower quality process will result in mold lines in bad places – such as down the middle of a miniature’s face. In the old days of hobby gaming this was more common as it was easier and cheaper to simply make the part lines where it was more efficient from an engineering standpoint. But our tooling engineers know to do what’s best from an artistic standpoint. In other words, to have part lines that, in general, are in out of the way places (though sometimes this can’t be avoided). If you’re somewhat familiar with molds, perhaps with resin and silicone ones, you probably know the saying that you need to avoid “undercuts.” Yes, that’s basically true – the two halves of the mold in the machine must be able to physically separate (although they emerge as very soft plastic, having been liquid a half second before, so a little bit of undercutting is possible). But with very sophisticated engineering you can have models with plenty of “undercutted” shapes on the final model due to how the piece was carved up.
At the end of this process what you will end up with are a bunch of square and rectangular blocks with cavities of various model parts and channels between them and slots and pegs, very similar to the metal blocks below, except made out of a polyurethane material:
Step four takes ALL the time. It can take several months.
Step 5: Ceramic Composite Positive
Once they have a disassembled version in PU that they are satisfied with, they use it to create a ceramic composite positive (i.e., it looks like the miniatures themselves). This step is critical because ceramics can withstand the heat of molten steel.
Step 6: Molten Steel Negative
This is the only step of tooling I have not personally witnessed in operation. This is because this step always takes place in the middle of the night, when the cost for electricity in China is much cheaper than in the daytime. They place the ceramic positive on a bed of sand, heat up molten steel, and pour it over the positive to create negatives (the molds themselves).
Step 7: Testing, polishing, refining
We aren’t done yet! Once they have metal molds that can fit into injection machines there are several days or even weeks left in the process. They run the mold in the plastic injection machines (where hot liquid PVC is squirted through the channels into the mold where the parts are created) for testing. One of the things they do is to literally cover one half of the mold with ink, run the machine, and see if the flat parts (that meet up and match to the other half) have ink covering them. This is a simple way to test if the mold is accurate. But it’s not the only thing done. They must grind away small irregularities or mistakes, and on occasion even add steel to it (though this is MUCH less common, and more problematic if it has to be done).
It’s probably not a surprise to learn that the many steps the model goes through – from red wax 3D prints to resin “masters” to an indeterminate series of PU versions to a ceramic positive to a steel negative – the model may not be quite identical to the original digital version. So, during step 7 they have to do small refinements to the mold by comparing it to the original red wax 3D print and ensure it matches as perfectly as possible.
Once they have refined the molds to their satisfaction, they make a sample in the correct Pantone color that I provide and mail me a copy. This is called the “T-end” sample (for “tooling-end”). But if I do not approve it, they refine it more and it becomes “T-end-2” and so forth. I’ve had to send back T-ends many times over the years, but still only for a minority of tooled miniatures overall.
In any case, it is generally only T-end (or beyond) versions that I show to backers (though I’ve shown images of prior points along the process at times).
Once approved, and once I have manufacturing numbers (which I usually have in advance of T-end), the factory can begin mass production, which involves making all the pieces, and then gluing them together to create the miniatures in an assembly line. Then, packaging them in game boxes with the printed components and you have a full game!
Estimating How Long Tooling Takes
From this overview you may be beginning to see why it’s so difficult to estimate how long “tooling” takes beyond very broad strokes (such as “4 to 6 months” or something). Each step has a range of time it could take from a few days to several weeks or months on occasion. One step might be unusually long and another unusually short, and there’s no way to know beforehand really. Part of this is due to the complexity of our projects. And all of this is conditioned by the number of miniatures and molds needed for the project as well. While step 4 above is always the longest step, many others can take several weeks, and more than a month. What I typically do is take an average of each step and then use that as a guess for the entirety of tooling, but any of you who knows how averages really work will know this will generate a poor rule of thumb.
And thus, we’ve had projects in which it took less than 6 months for tooling, and other projects in which it took more than 1 year. That’s a big range. With my small sample size of a dozen projects at most, I can’t hope to properly predict how long each project’s tooling will take – and even though the factory engineers have MUCH more experience than me in how “long” tooling takes, due to the fact that this is OEM manufacturing and each miniature and project is technically uncharted territory (a given Planet Apocalypse miniature was never made before it was made), even tooling engineers will only give me a very broad guess as well. And thus it is.
I had been meaning to write a long post-mortem on the Planet Apocalypse project, but haven’t had a chance to devote headspace to it, while being as continuously busy as I am. One of the things we’ve been busy with is expanding our stable of freelance developers for a vast increase in RPG publications we have in our pipeline.
Just today and in the past few days I had a rather weird experience, and perhaps as a way to therapize it for myself, I’m writing out what happened by sharing the back and forth communication – leaving out names and a few specifics of course.
We were connected with this person by another developer we are working with for a future project as someone who may be interested in helping out on the same project. He was someone a few of us were familiar with – I had at least one RPG book with his name in the credits, for example, and read his RPG blog, as did some others on our team. So we were keen on working with him. Unfortunately, it’s very much not going to happen now. Here’s the emails:
[Developer]: [After plenty of positive emails culminating in an agreement to hire him to work on this project, absent the detail of his pay rate.] “That’s great Arthur, were we going to discuss money at any point?”
Arthur: “Wait, aren’t you doing all this for free? ha. I apologize – I had thought this was arranged already with Christine [our business manager], and I apologize. Since the full scope of the work is very TBD, I’d prefer a rate per final word, over a flat fee. We can offer [$X] per word of the final manuscript as approved and submitted for editing. How does that sound?”
[Developer]: “Hmm, I need to think about this Arthur, I assume its ok if i take a night to sleep on it?”
[Developer]: “Hello Arthur, I’m sorry to tell you this but for a variety of reasons I don’t think I will be able to go ahead with Petersen Games. I have my Kickstarter which needs a lot of Admin for fulfilment, contracts with other companies and my self-owned projects, and a per-word rate really doesn’t work well with how I do things; I usually put a lot of thought into stuff and try hard to get the word-count _down_.
I think the process of escalation on the project has gotten away from me a little. At first I was really interested in working with [Other Developer], then that lead to [Project], then that lead to Petersen Games and the nature of things has changed quite a bit over that process.
I do wish you all at Petersen Games the best with the project and I hope it works out. My apologies for the wasted time, I think we can put this one down to experience.
Please feel free to use any of the ideas in the pitch documents.”
Arthur: “I’m sorry to hear that. If a per word rate does not work for you, can you tell me a counter proposal for what you have in mind? We would still love for you to Contribute to this project.”
[Developer]: “I have no counter proposal. I very much dislike negotiation and my previous email was not the start of one. I consider the matter closed as of now.”
Arthur: “I feel as if we’ve done something to offend you? I am having a difficult time understanding the extreme change of tone and the situation. I’m not sure what you mean that the “nature of things has changed” and that the process has “escalated” – please enlighten me!”
[Developer]: “Arthur, When I tell you I’m not doing something in very final words. And then you email me back asking to negotiate. And then I directly and explicitly tell you that I very much dislike negotiation. An that I consider the matter closed. That is me telling you in the most explicit and bordering-on-rude terms that I consider the matter close and do not want to talk to you about it. I am telling you, simply, directly and in the most absolute terms – your repeated attempts to contact me and to extend a conversation which I only desire to leave are unpleasant and upsetting for me. This conversation is over. Do not contact me again.”
Yikes! So, when I forwarded this to Christine, she opined he seems a little unstable, and better to discover this now, then in the midst of working on the project.
Consider how discombobulating this was for me. He begins with a clear invitation for a discussion (“were we going to discuss money”), but then refuses to negotiate, also without having told me any baseline or standard rates he might have. What?
The first thing I can think of is that the proposed price I offered was below what he thought he deserved. But how could I have known that in advance? I’m not a mind reader, and he never proposed any price whatsoever. A reasonable person, having not communicated an expected price, would have to be prepared for some level of negotiation – there’s no other way around it. We’ve hired several dozen – possibly close to a hundred – different freelancers over the years at Petersen Games. Artists, sculptors, graphic designers, editors, proofreaders, game designers, writers, programmers, website developers, and more. And not once has the conversation been even remotely like this one. Some freelancers have standard rates. And we also offer standard rates. But there is often deviation (on both sides) from those, because that’s the nature of hiring freelancers.
It’s also possible he already thought he couldn’t take the project on with everything else going on in his work or life, and used this as an opportunity to say so. But he chose a rather odd way of communicating this – by claiming he refuses to negotiate and telling me to never contact him? Bizarre.
And just his word choices were stunning – like actually stunning to me, in that I didn’t know how to react at first, and kind of sat there in a brief stupor. I thought I was having a rather normal back and forth between a publisher and potential freelancer, and then suddenly “I consider the matter closed as of now” and “That is me telling you in the most explicit and bordering-on-rude terms that I consider the matter close and do not want to talk to you about it.” What?? It wasn’t “out of the blue.” I’d describe it as “out of the red.”
I’ve previously written about how a small publisher prices games generally (see here), as well as how we price shipping for Kickstarters (see here), and also about sales tax for US backers (see here).
Today I’ll tackle a long discussed (if not overly prominent) topic on Kickstarters: Those darned expensive European shipping costs (i.e., VAT).
Before delving too much into VAT itself, I’d like to build an initial frame for everything by pointing out a fundamental feature of Kickstarter projects that is (generally) unseen by backers, but at the forefront for creators: the distinction between known and unknown costs.
It is very easy to grasp that Kickstarters provide a huge benefit to creators: up front capital to make a project happen – indeed, that’s the entire point!
But there’s a flip side to this coin: predicting accurately the final costs of goods sold. You see, a business that follows the normal course of events has the luxury of adjusting their pricing (and doing other things with their product) AFTER they’ve seen the full costs of developing and manufacturing it. Obviously there are details and nuances (sellers don’t have ultimate control over pricing in a competitive market), but my basic point is true: that if a new product ends up costing more to make than a seller initially anticipated, they can do things before it hits the market to ensure they’ll recuperate their costs and have a decent margin (net profits), so they can continue to exist as a company.
A Kickstarter project, unfortunately, does not have any such luxury. No matter what happens or changes in terms of costs while developing and manufacturing a project, we cannot derive more revenue from the backers to make up for this. We already set our prices and received the funds – that’s it.
So, if something causes our costs to rise, doesn’t matter. We are still obligated to fulfill what we promised to backers. Period. (I could delve more into this facet of crowdfunding as it is relevant to many common backer gripes such as the idea that some KS creators launch new projects to pay for previous ones – but that’s a huge separate discussion by itself).
The following are a sampling of variable costs we nevertheless have to account for when setting prices before a new Kickstarter:
Miniature Tooling costs
Mass manufacturing per unit costs
Additional development (art, design, etc., if needed)
The variability isn’t necessarily super huge in each of these aspects, but even a 5 or 10% shift in several of them can mean our pricing is WAY off, as to what it should have been. For example, if we set a game to be $79 on Kickstarter, but the final costs of goods sold analysis tells us it should have been $99, that can be very bad, financially, resulting in tens of thousands in lost revenue.
(If your initial reaction is to suggest we merely always add in a buffer to our prices, there are further variables we must consider. Among them is the price elasticity of a new product – the relationship between price and sales volume. If we simply raised all our prices by, say, $20, we may reduce our total sales by an amount that more than offsets the added revenue, making it a very bad idea).
VAT – one of the few costs that can be perfectly known in advance
If you’re following all of this carefully, there is a silver lining! There is at least one type of cost that is fixed and known in advance no matter WHAT happens – The import taxes and value added taxes of each country and region.
The European Union and virtually all European countries that are not part of the EU charge a 19% value added tax to goods sold there (whether from domestic or foreign sellers). This VAT is inescapable for all goods sold into the EU, no matter where it was produced or who sold it – whether a domestic or foreign company.
Like retail or sales tax that is found in many places in the US, VAT is ostensibly “paid” by the end consumer, but it is actually reported and paid to the government by the seller (in this case, Petersen Games).
This is inescapable. If we failed to pay it to the European Union, we could have our products seized!
Here is further reading – official information from an official website of the EU which explains everything I wrote above, as well as additional information (see here).
Why don’t other Kickstarters charge me for VAT?
Some very well might, without directly showing you that they do. Some may not. But unless they are acting illegally, they are paying the VAT to the European governments for all backers they ship to inside Europe.
Before exploring how some KS creators may be handling VAT, let’s take a step back to see how the VAT payment fits into the cost of goods sold overall.
The VAT percentage is assessed on the TOTAL sale value of the goods (even including the shipping cost***). So, a game that is sold for $100 would require a payment of $20 to the EU government the customer lives in. That means that Petersen Games really only gets $80 for this game sold into Europe. And that’s going to be cutting it very close (or possibly will be LESS than our real cost to sell each unit). When you factor into all the up front costs needed to develop and manufacturing a game – miniature sculpting, art, tooling, etc. – margins on large games are pretty slim (I went into detail on this here in which I showed how a nearly $600k Kickstarter of ours ended up losing money overall). What this means is that we really and truly don’t have $20 left over per copy sold just to give to the EU.
So how in the heck do other Kickstarter creators avoid it? Assuming they are not acting illegally, and they are also not showing you any VAT charges, there are a few possibilities they could be operating under.
Possibility 1: Having some backers subsidize others
First, they could be spreading the VAT through a combination of the sale price and/or shipping prices they charge. For example, in the example of a $100 game, with a $20 VAT, let’s say that it costs the same to ship this game to the US and Europe – $20. This would mean that the cost for a game sold to Europe is $100 (game itself) + $20 (VAT) + $20 (shipping) = $140 total. And a game sold to a US backer is $100 (game itself) + $20 (shipping) = $120 total. To even these out in order to not scare away EU backers or to make it “fair”, you could increase the shipping to $30 for both the EU and US, and not “charge” VAT at all. This would mean the US backers are paying $10 more than they really “should” and the EU backers are paying $10 less.
There are two fundamental problems with handling it this way:
1. Subsidies are not fair.
I put the word “fair” in quotes above because it merely appears to be fair – you are charging the same total price to customers in different places. But shuffling prices around in this way is actually the opposite of fair. It does not cost the same to sell the same product to different customers, and so these different buyers are often charged differentially (in the real world, outside of Kickstarter) to account for this. That’s why there even exists such an economic measure as “purchasing power parity” which would not make sense as a thing if every given product were always sold at the same price everywhere. It is not the fault of backers in other countries that the European governments impose such an extremely heavy value added tax on all goods sold there. Backers in other places should not have to subsidize them.
2. The subsidies will be wrong unless you can see the future.
It’s also a bad idea unless the KS creator can accurately predict the number of backers from each country or region. In the example above, with a single EU backer and a single US backer, it was an easy calculation to say that by simply removing the VAT charge and then adding $10 to the shipping for both they both pay $130. But what if 250 backers are from the EU and 750 are from the US? This would mean that the US backers are, overall, paying far more than is needed to cover the actual cost of the VAT!
Let’s work it out so you can see how off it would be. The VAT for those 250 backers would be 250 times $20 = $5000. But the money received to account for the VAT is 1000 backers times $10 = $10,000. The KS creator just got an additional $5,000 that does not have to go towards VAT or anything! Going back to the question of fairness – it’s not simply that non-European backers are unfairly paying for taxes they don’t have to pay, it’s ALSO a way for KS creators to possibly derive even more revenue unfairly from non-EU backers!
And of course, the KS creator could be screwed if the opposite ends up being true – what if there are 250 US backers and 750 EU backers? In this case, the VAT cost is 750 EU backers times $20 = $15,000. But the money received is still only $10,000. In this case, the KS creators will have to cough up $5,000 to cover the Europeans’ taxes. Also not fair. And it only gets more confusing and intractable to calculate the more other countries and shipping prices you add in to the equation.
The bottom line is that without knowing in advance how many backers will come from each region, you can’t possibly set the subsidized shipping price accurately. Subsidies aren’t fair in the first place, but this unfairness is compounded when the numbers are all wrong anyway!
Subsidies have the clear downside of completely removing just about the only good thing about VAT – that it is a perfectly known cost beforehand! I believe that Kickstarter creators who are shuffling it into the product and shipping prices are not only doing a disservice to non-European backers, but are also not being very careful in their budgeting and financial calculations!
(To be completely fair, though, it is possible a KS creator doesn’t set shipping prices at all until after the Kickstarter is over so they can see the mix of backer countries – but this is very rare. Backers always want to know how much shipping will be during a Kickstarter nowadays)
Possibility 2: Accepting a smaller margin
The second possibility is that KS creators are simply accepting a 20% smaller margin from all European customers without accounting for it elsewhere. This is possible, but I would consider highly unlikely. Given the fact that most products in the final analysis won’t even have a 20% margin to begin with (as noted above, and again here), this effectively means that a KS creator is basically losing money on each European backer. If that is happening, it’s because the seller didn’t properly analyze the numbers, not because they’re a charity. I regard this possibility as so unlikely that it never occurs on purpose. A KS creator who does this is much likelier to simply be unaware of the VAT (as Petersen Games itself was, when it launched Cthulhu Wars in 2013 and absolutely did not account for the VAT – which nearly bankrupted us on the eve of shipping the “wave 2” back in late 2015). Since then, we’ve always accounted for the VAT somewhere in the numbers. Not doing so is very very dangerous – 20% is a BIG portion of the cost for a product.
What about that “Friendly Shipping” thing? Doesn’t that mean I don’t have to pay VAT?
“Friendly Shipping” is a clever idea that some Kickstarter creator came up with long ago to say that you don’t have to deal with any paperwork or money at the receiving end of the KS rewards.
To understand this, there’s a dichotomy in shipping things international that used to be referred to as DDU or DDP (the terminology has changed in recent years, but these acronyms still work well for the concept). DDU means “duties UNpaid” by the shipper, which means that the recipient therefore has to pay those fees. DDP means “duties Paid” by the shipper, which means that the recipient gets the package, and doesn’t have to cough up any money to physically receive it.
“Friendly Shipping” means that the packages are sent DDP – that the sender handles the paperwork and pays the duties and taxes. But that money used to pay the duties and taxes has to come from somewhere! And in the end, it’s really going to always come from the consumer, as I outlined in my previous section.
Yes, I understand that some KS creators represent that “when it ships from within Europe, there are no VAT fees” but this is simply not true. Sellers still have to pay VAT on all those goods, even when “shipped from within the EU” (as we ourselves do – our European hub is inside Germany). All the paperwork and actual VAT payments are made by the seller on the buyer’s behalf. But it still has to be paid. The government will collect taxes even if you put a “friendly shipping” badge on your Kickstarter!
***So, if we charged $100 for a game, and $20 for shipping, a 20% VAT would actually be $24, not $20! The government includes the TOTAL sale price that the customer paid in its entirety. And based on how WE charge things, yes, this means we are paying a “VAT” on the VAT portion of the shipping that we charge to you (though we just eat this cost, obviously, since it’s minute). Yes, it’s ridiculously stupid – we are not at all fans of how the EU bureaucracy tries to stifle free business transactions.
A few weeks ago we began charging sales tax on our pledge manager for all Kickstarter sales. (This did not extend backwards to already paid orders). We received lots of comments about this, so I asked our accountant for a concise explanation (a few paragraphs down). Let me jump right in to the issue.
But that’s merely a message from Kickstarter to project creators. Kickstarter is merely acknowledging that sales tax may be applicable, and as with any business, it’s really up to us to figure out what we actually have to do with regards to the law, regulations, and taxes.
Petersen Games has been paying sales tax to several states for several years. It is something we have always had to factor into our Kickstarter pledge level and add-on prices. But it’s generally been a low amount overall. Because of the small amounts and the relatively low number of states involved, it never made sense for us to set up a way to explicitly pass those costs on to each backer, even though that is the prescribed thing to do for any business.
That changed for us this year when our accountant told us that we effectively will have to be paying sales tax to virtually all of the 50 states.
Here is a message directly from our CPA:
“In light of the recent Supreme Court ruling over South Dakota v. Wayfair, the collection and remittance of sales tax on internet sales, online crowd funding included, becomes applicable when a company has sufficient connection to the location of the buyer. Furthermore, crowd funding creators are required to collect sales tax on donations in the event they provide retail services (such as meals), digital products or tangible personal property (books, videos, copies of games, etc.) as rewards.”
Here is a helpful excerpt from the linked Wikipedia page regarding that recent ruling:
“As of December 2018, 31 different states have standing tax laws requiring taxation of Internet purchases, most following the model of the South Dakota to only collect tax from those vendors with more than 200 shipments into the state or exceeding $100,000 in revenues. Several of these new laws came into effect on January 1, 2019.” [emphasis added]
We cannot speak for other project creators as to how they handle their sales tax obligations. But like Amazon and Walmart.com, as well as any brick and mortar retailer in your town, we have to pay sales tax on what we sell, regardless of whether the customer “sees” this tax or not. And like with any business, including Amazon and Walmart.com, it’s not a cost we can roll into the sale price – it’s an itemized, separated charge that is illegal for us to keep for ourselves. We pay it to the states on a quarterly basis.
Trust me, we don’t like taxes any more than you do! But like death, and the rise of Cthulhu when the stars are right, it is one of the inevitable things in life.