29 May 2009 Shutterstock and Tax

Shutterstock have announced that they’ll be withholding 30% tax for non-US contributors in order to comply with US tax laws. Contributors from countries with US tax treaties can submit appropriate forms to the US Internal Revenue Service (IRS) to have the withholding tax reduced or eliminated, depending on their countries specific tax treaty.

But Why?

The change is initiated by advice from Shutterstock’s legal counsel. As it’s US law, other US-based microstock agencies may eventually do the same thing.

Compliance with these laws must be important as Shutterstock will incur great expense to update their systems and processes to withhold taxes with no benefit other than the compliance itself. They’re also absorbing these costs rather than passing them on to buyers in the form of higher prices, or to contributors in the form of lower commissions.

When first making the announcement, Shutterstock detailed the reasons for the change and what affected contributors needed to do, complete with links to the IRS forms and a list of countries with tax treaties. They also agreed to hold off implementing the changes until the end of June to give contributors time to complete and submit the necessary applications. As it’s a complex matter, there were questions which Shutterstock collected and answered in a subsequent FAQ forum thread.

Contributor Reaction

Affected contributors are understandably upset. Until now, tax has been left completely up to them. Now they need to submit applications to the IRS and provide forms to Shutterstock, and/or have tax withheld which they may or may not be able to claim back from their own government’s tax department.

Most microstock contributors are in business so they’re used to doing things like filling out forms and paying taxes. However, a not-so-small number of contributors, it seems, are not so comfortable with this change.

Some complaints have been expressed in the Shutterstock forums and at Microstock Group. The more common ones are:

• taxes haven’t been withheld before, so why are Shutterstock starting now?
• other agencies don’t do this, so why is Shutterstock doing it?

That’s about where the rational and logical complaints – each of which Shutterstock has addressed – end. Contributors went on with complaints that are difficult to understand:

• why do I have to pay tax to the US government when I have nothing do to with them?
• why do I have to give personal information to the US government?
• can’t Shutterstock pay for this themselves and not penalize foreign contributors?

The demonstrated gaps in understanding of international business in these complaints extended to misdirecting blame and anger toward Shutterstock.

In addition to complaints and threats to remove their portfolios in the Shutterstock and external forums, contributors also revived the new crowd tactic of the protest avatar (shown to the right), a tactic first used at StockXpert during the photos.com controversy and again in the recent uprising at iStockphoto. They also created a petition where contributors could sign to have Shutterstock “take full ownership of the IRS withholding tax issue, in whatever way they see fit so that the contributors are not penalised either financially or by being obliged to divulge personal information”.

Shutterstock Responds

Despite all the information, answering questions and holding off the implementation, some contributors remained convinced Shutterstock wasn’t on their side. Shutterstock temporarily closed their entire forum to stop the flood of negative posts, after which CEO Jon Oringer reacted with a strong announcement. He requested contributors calm down, addressed some key issues and threatening to remove the portfolios of the contributors who had threatened to do so themselves or who used the protest avatar. It was later replaced by a slightly less strong version containing the same basic message.

Jon’s first response was widely labeled by complaining contributors as “rude”. I didn’t think so, but I could see how it wasn’t a stretch for anyone already angry with the company.

What’s All That About?

There’s a clear climate of aggression in the microstock market. Contributors are quick to unite and attack a microstock agency which makes a change that’s not in their favor. It’s becoming routine and the crowd tactics are evolving with each instance.

A relatively small number of contributors participated in this particular uprising. Partly because US contributors were unaffected, and partly because the more serious contributors know it isn’t a big deal. Regardless of the size, it was disruptive enough to have the Shutterstock forums closed.

All my microstock income goes through my registered company in Australia. I will need to submit the IRS forms to obtain an EIN, but it won’t be too much of an inconvenience for me to submit just another tax form for my business. According to the Australian-US tax treaty, Shutterstock will withhold 5% of my earnings. I’ll need to claim that back through the Australian Tax Office (ATO) when I submit my corporate tax return each year. However, my company won’t register a different profit or loss as a result of paying tax to the IRS rather than the ATO.

This issue highlights some aspects of the power struggle between contributors and agencies in the microstock market. It’s an interesting dynamic, very different to that in the traditional end of the market, and it’ll be the subject of some exploratory blog posts in the near future.

The best source of information on the Shutterstock situation is their FAQ thread here, plus Matt has collected some helpful links to more information and exploration of the details over at Niltomil.

Update: Shutterstock have just announced the tax will be calculated based on US source income only. This means sales from buyers outside the US won’t be included in the withholding calculation.