Everything You Must Be Aware of Digital VAT and Taxes
Do you struggle to keep track of digital taxes in the global market? It's not just you. The U.S., states were initially slow to adapt to the taxation of digital downloads, after which they enacted a flurry of new regulations. If you travel outside in the U.S. and you have additional complicated rules regarding the taxation of digital products. In particular, countries under the European Union will apply varying amount of Value added Tax (VAT) on all imported digital goods as well as services in the name of the fairness of EU sellers.
It's a lot to absorb. Also, SaaS sellers must do correct or else face fines from both their home country as well as the countries in which they conduct business abroad in. The failure to sign up for VAT, or properly apply it, could lead to hundreds of dollars in penalties and could lead to your digital product being banned from sale in some countries.
This article will show you how to comply with tax law to protect the name of your SaaS company in selling digital goods on the internet.
What is digital goods or product?
In this blog, we're going to define digital goods as intangible physical or non-physical products that exist in digital format. Some examples include:
- Downloaded software (photo editors DJ software, photo editors, etc.)
- Digital assets (ebooks, image files, audio files/audio clips, films or digital video)
- Web applications/Software as a Service (SaaS)
One of the best things regarding digital goods is that due to their digital nature, they are able to easily reproduced and sold without requiring businesses to navigate complicated manufacturing processes. Furthermore, since the majority products that are digital exist in digital form, buyers can access the software or the service that they bought immediately, and not have to wait for an product to be shipped and delivered.
Understanding Taxation Within the United States
States within the U.S. have a mishmash of laws pertaining to digital taxes. North Dakota and Washington D.C. aren't taxing digital downloads. However, Alaska, Delaware, Montana, New Hampshire, and Oregon do not have any retail sales tax at all.
In recognition of the growing popularity of online sales of digital products, many states like Alabama, Arizona, Indiana, Louisiana, Maine, New Mexico, Texas, Utah and West Virginia decided to cover digital downloads with no modifications to their existing tax statutes or by simply expanding their definitions that they use to define "tangible personal property" to encompass digital goods.
Many other states have passed particular laws, which define digital downloads in a variety of ways while they are always taxed including Colorado, Connecticut, Idaho, Kentucky, Nebraska, New Jersey, South Dakota, Tennessee, Vermont, Washington, and Wisconsin.
But what digital businesses should be mindful of the most is that the laws surrounding the sale of digital goods will change. Look at the latest Wayfair State Tax ruling. The Supreme Court declared that online sellers can be legally required to collect sales tax within the states they operate even though they do not have a physical brick-and-mortar store. In addition, given that tax rates will vary from 1% to 7percent, keeping track of the "digital merchandise market" isn't easy.
But if you think that you can afford to ignore taxation on the selling of digital products, think again. The U.S. federal government is taking a keen look at digital taxes and may consider the sale of digital items as a tax-deductible event in the future. In 2011, The Internal Revenue Service (IRS) established the post of Director for Transfer Pricing to investigate nationwide prices and taxation of SaaS services.
Taxation within the European Union
The E.U. introduced the VAT that is applicable to all imported products and services to encourage its citizens to buy from E.U. businesses. Digital products are generally defined by VAT. This means that if you sell to E.U. citizens, this probably applies to your business.
The VAT rates differ between E.U. countries, ranging from 15 to 27 percent - something you should remember when pricing your SaaS to E.U. buyers. If you fail to account for the taxes, your digital product is likely to be expensive compared to E.U. competitors.
Similar to selling to different states within the U.S., selling to various countries in the E.U can be difficult because of tax rates that vary and methods of application. Some time ago, some SaaS companies tried to sidestep the whole tax issue by setting up small subsidiaries within E.U. countries. Do not try it now, VAT is now modified so that it applies to all sellers regardless of their location.
Doing it Right
Obviously, it's difficult to be sure the digital enterprise is in compliance with both international and local tax laws. That's why experts advise partnering with an online commerce platform - - a firm which specializes in international financial transactions.
An ecommerce platform like stays in the forefront of tax codes and international law. This lets you concentrate on developing and selling your product, and also manage the transactional details like taxes.
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