Everything You Must Know About Digital Taxes and VAT

Do you find it difficult with tax management of digital products in the world market? You don't have to be concerned. Within the U.S., states were initially slow to adapt to the taxation of digital downloads. However, they suddenly adopted a series of new regulations. When you travel outside the U.S. and you have additional complicated rules regarding taxation on digital products. Particularly, countries under the European Union will apply varying amount of Value added Tax (VAT) on all imported digital goods and services in order to ensure fairness to EU sellers.

It's a lot to process. There's lots to absorb. SaaS sellers must do it right or face penalties in both their country of origin as well as those countries they conduct trade in. Inability to declare VAT or to properly implement it can result in paying hundreds of dollars in penalties and could lead to your online product being prohibited from being sold in specific countries.

This article will show you how to adhere to tax law as well as protect the name of your SaaS business when selling digital goods online.

What qualifies as digital goods or digital product?

To make this blog post This blog post, we'll define digital goods as tangible physical and non-physical goods which are digital in nature. Some examples include:

• The software downloaded (photo editor DJ, photo editors etc.)
• Digital assets (ebooks, image files, audio clips/audio files, films or digital videos)
• Web applications/Software as a Service (SaaS)

One of the greatest benefits of digital products is that due to their digital nature it is easy to duplicated and sold without the need for companies to handle complex manufacturing processes. In addition, as the vast majority of products which can be bought online are digital purchasers can make use of an application or product they purchased swiftly, without needing wait for items to be delivered and shipped.

Understanding the Taxation System in the United States

States of the U.S. have a mishmash of tax law that regulates downloads via digital media. North Dakota and Washington D.C. aren't taxing digital downloads. In contrast, Alaska, Delaware, Montana, New Hampshire, and Oregon don't have tax on retail sales at all.

In recognition of the growing popularity of electronic goods that can be purchased online, states such as Alabama, Arizona, Indiana, Louisiana, Maine, New Mexico, Texas, Utah and West Virginia decided to cover digital downloads with no modifications to tax law that they have already in place or by simply expanding their definitions of "tangible personal property" to include digital products.

Many other states have adopted specific laws, which define digital downloads in various ways, but they are always taxed which comprises Colorado, Connecticut, Idaho, Kentucky, Nebraska, New Jersey, South Dakota, Tennessee, Vermont, Washington and Wisconsin.

What digital companies need to realize is that the regulations governing the sale of digital products are expected to change. Look over the most recent Wayfair state Tax ruling. The Supreme Court declared that online sellers can be legally required to collect sales tax in the states that operate without an actual brick and mortar store. This is in addition to the fact that taxes can range from 1 7 percent to 7% and a need to track the "digital product market" is a problem.

If you believe that you're able to avoid taxes on digital goods, think again. It's important to remember that the U.S. federal government is particularly attentive to digital taxes  as well as the sale of digital products as an event that is tax-deductible in the future. In 2011, in 2011, the Internal Revenue Service (IRS) appointed the Director for Transfer Pricing to study taxation and prices across the country in SaaS items.

Taxation in the European Union

The E.U. implemented the VAT that is applied to imports of all items and services in order so that citizens of the EU are urged to shop E.U. businesses. Digital products can be broadly described as being VAT-related. This means that when you market your product to E.U. citizens, it almost certainly will apply to you.

VAT rates vary among E.U. countries ranging from 15 to a percent. This is one thing to bear in mind when pricing your SaaS service for E.U. buyers. If you do not consider taxes for your digital item, it's likely to be costly when compared with E.U. competitors.

Similar to selling products to various states in that U.S., selling to various countries within the E.U could be difficult due to the existence of tax rates that vary and the ways of applying. There were some SaaS companies that tried to reduce the tax burden through the formation of small subsidiary businesses that had E.U. countries. It is not a good idea to try this at present; the VAT rate is now for all sellers, regardless of their location.

Doing it right

Naturally, it's hard to know if your business online is in compliance with international and local taxes. That's why experts recommend partnering with an online commerce platform or a company that is specialized in international financial transactions.

An ecommerce platform like stays on the forefront of international and tax law. It lets you focus on marketing and development of your item, and additionally manage information related to transactions, such as taxes.

Are you ready to discover how FastSpring can improve the back of your office? Follow this link to get your FREE demo now!

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