Comment by jacquesm | Hacker News Reader

Comment by jacquesm | Hacker News Reader

One simple reason why most VCs don't do this is because they are sales tax exempt and so end up losing up to 21% of the bills to a bookkeeping quirk. So it's easier to pay a bit more out of the fund and end up with a deductible on the side of the company invested in than with a freebie to the tax collectors.

In numbers: if a complete process costs $100K and the investment is 2M the fund is out 2.1M. If they pay the bills from the fund directly they're out 2.1M without a sales tax return, if they pay 2.1 to the company and the company pays the bills the company gets back the sales tax so effectively this saves 20K or in this example about 1%. Not much but also not nothing, and if a fund does a lot of smaller deals this sort of thing adds up.

Not all funds suffer from this (likely Spark isn't one of them) so the ability of other funds to match this is dependent on whether or not they have classed themselves in such a way that they are sales tax exempt.

I'd imagine Spark to be able to offer exactly the legal fees less for the same amount of stock in company 'x' compared to some competitor that does it the usual way so effectively this shouldn't matter but it is excellent publicity for Spark.

While there are some US states that have considered taxing legal fees, this is certainly not the norm. Services are typically exempt from sales tax. From page 19 of California's guide to sales/use tax exemptions:

> SERVICES—The sale of services where no tangible personal property is transferred or where the transfer of property is incidental, are not subject to sales and use taxes.

Source: http://www.boe.ca.gov/pdf/pub61.pdf

The world is a LOT larger than just California. I love it how HN lumps every VC and every lawyer into the same pile as though we all live in Silicon Valley.

And I love it how you lump every HN poster into the same pile as though we all live in Silicon Valley. It's probably too late for you to read this, but you're jumping to your own conclusions...

I've been on HN long enough to recognize your nick and I was well aware that you live in Europe. You jumped into a discussion about a US-based VC firm and claimed it was motivated by sales tax. Please don't get irate just because "HN" tried to be helpful by explaining why sales tax wouldn't apply here.

And for the record, I live 5,000+ kilometers from the VCs on Sand Hill Road.

Huh? I've paid a lot of legal fees and never remember seeing sales tax on them. I don't understand what you are saying.

I've paid a lot of legal fees as well and they always had sales tax on them.

HN seems to be a bit myopic in this sense, that if something hasn't happened to an individual therefore it doesn't happen.

But not everybody here looks at the data through the lens of a VC and that is what we're discussing here.

In this thread VCs are equated with a cartel, the truth is they're all continuously in competition with each other rather than colluding with respect to making terms sheets that are worse for the companies they invest in.

Terms sheets are negotiable on a per-case basis, if you can get better terms with a different VC then you should go for it, there is nothing that is 'always done this way' and any unspecified cost can be made into a certainty by either putting a cap on it or negotiating a lower investment with the other party accepting the fees to be paid to be directed to them if that gives you more peace of mind.

While sales tax is usually a state issue and our disconnect may be the result of working in different states (I am in NY), you can see from the American Bar website that it's clear that sales tax is not usually levied on lawyer fees: http://www.americanbar.org/advocacy/governmental_legislative...

That link shows the American Bar saying 'Don't start charging sales tax on legal fees' which implies that they don't currently charge them.

"Currently, only three states have a tax on legal services – Hawaii, New Mexico and South Dakota"

So where do you work?

I think the myopia here is you assuming that VCs don't normally pay legal fees because it's a sales tax problem and they don't want to waste money.

US sales tax and VAT are not the same type of tax, main difference is that sales tax is paid only at the retail level (by the consumer) while VAT is paid at every stage: a company would pay VAT to acquire raw materials, retailers VAT to acquire the packaged goods and consumers VAT on the final purchase. As far as I know no US state applies sales tax on legal bills so for US VCs there is no tax issue on this

> so for US VCs there is no tax issue on this

Indeed. But since in this thread all VCs are considered equal it would be worthwhile to point out that particular difference lest this leads to EU venture capital companies being branded as cartel operating vultures.

As an aside, the whole thing strikes me as a PR move rather than one with real effect, it's a zero sum game, lawyers will get paid one way or the other and there is only so much money to be divided.

Regarding VAT, what you write is misleading in that VAT is also reclaimed at every step (or more usually, offset against VAT due).

The net effect is pretty much the same as a sales tax, except the tax revenue becomes due proportionally at the step in the chain where the value is added rather than all at once at the retail level.

Indeed. The effect is the same in the end if the sales tax is paid and not avoided (e.g., no receipt). With VAT at least the taxes on the intermediate steps of production will have been paid even if the retailer and consumer are cheating at the final step.

I find this very interesting (and illuminating). I'm a little confused on what you mean by "getting back the sales tax" (probably because all I can think of is the sales tax I get charged when I buy something at the store).

For corporations it works a bit different, depending on your jurisdiction sales tax is either only added at the last stage (business to consumer) or it is added at every stage and returned back to businesses when they do their quarterly or annual tax filings.

You mean VAT in EU?

Yes, in the EU this is VAT, mehrwertsteur, BTW or whatever it is called locally.

VAT is not sales tax. http://taxtalk.co/sales-tax/sales-tax-vs-vat/

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