The goods are fake, but the tax is real

Here's some news from Sweden, a jurisdiction which is known to have had a most enthusiastic view of reaping a healthy tax harvest where possible. The Administrative Court of Appeal, upholding a decision of the Administrative Court, has held that a couple who sold counterfeit goods via the internet were liable to pay Value Added tax (VAT) on all their sales.  The couple first sold fakes over the internet in 2003 as a sideline; their counterfeit stock was later seized and confiscated by the Swedish police under a joint complaint by several trade mark owners, and they were banned from selling goods on Tradera, Sweden's largest online auction site (owned by eBay).

The couple argued that they were not obliged to pay VAT on the sale counterfeit goods in Sweden since it was illegal to sell them.  After all, it was wrong for the Swedish state to profit from illegal transactions [There's a problem here: either the State profits from the transactions by taxing them or the infringers profit from them by entering into VAT-free transactions]. The Administrative Court disagreed: under Swedish case law, income derived from criminal activity must be taxable if it is part of a legal activity. Apart from their illegal activities, the couple also generated a profit from the trade of legal goods. VAT was thus payable on all income derived from the sales.  This decision has since been affirmed on appeal.

Source: article, "Online sales of counterfeit goods held to be subject to VAT", by Tom Kronhöffer and Linda Petersson (MAQS Law Firm, Stockholm) for World Trademark Review.