Everything You Must Learn About Digital Taxes and VAT

Do you struggle to keep track of digital taxes in the global market? It's not just you. Within the U.S., states were initially slow to adjust to digital download taxation, but then they suddenly adopted a series of new rules. Travel outside within the U.S. and you have even more complicated rulings around the taxation of digital items. As an example, countries under the European Union will apply varying amounts of the Value added Tax (VAT) on all imported digital goods and services, for the fairness of EU sellers.

There's plenty to take in. It's a lot to take in. SaaS sellers must do it right or face penalties for both their country of residence and those they conduct business abroad in. The failure to sign up for VAT, or to apply it correctly, can result in hundreds of dollars in penalties and could lead to your online product being barred from selling in certain countries.

We'll take a look at ways to comply with tax law and preserve the reputation of your SaaS business in selling digital items online.

What counts as a digital good or digital product?

For the purpose of this blog post, we're going to describe digital goods as non-tangible physical or non-physical products that exist in electronic format. Some examples include:

• Downloaded software (photo editors DJ software.)
• Digital assets (ebooks images, files with images, audio clips/audio files, movies or digital videos)
• Web applications/Software as a Service (SaaS)

One of the best things with digital items is that due to the fact that they are digital, they are able to easily be reproduced and resold without the need for businesses to manage complicated manufacturing processes. In addition, as the vast majority of these digital goods exist in digital form, buyers can get access to the program or product they purchased immediately, and not have to wait for an product to be shipped and delivered.

Understanding the Taxation System in the United States

States in the U.S. have a mishmash of tax law governing digital downloads. North Dakota and Washington D.C. don't currently tax digital downloads. However, Alaska, Delaware, Montana, New Hampshire, and Oregon don't have retail sales taxes at all.

With the rise of online sales of digital products states such as Alabama, Arizona, Indiana, Louisiana, Maine, New Mexico, Texas, Utah and West Virginia decided to cover digital downloads, without altering their existing tax statutes or simply by expanding the definition 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.

What digital companies must be aware of is that the law governing selling digital products are likely to evolve. Just take a look at the recent Wayfair State Tax Ruling. The Supreme Court has ruled that online retailers may be required to collect sales taxes in states they do business even though they do not have an physical brick-and-mortar shop. Combined with the fact the tax rates can vary between 1% and 7percent tracking the "digital products space" can be tricky.

However, if you believe you are able to afford not paying taxes associated with the sale of digital goods beware. It is important to note that the U.S. federal government is particularly attentive to digital taxation and could treat the sale of digital goods as an event that is tax-deductible in the future. In 2011, the Internal Revenue Service (IRS) appointed the Director of Transfer Pricing to investigate the taxation and prices across the country for SaaS items.

Taxation within the European Union

The E.U. introduced the VAT that applies to all imports of goods and services, in order to convince its citizens to prefer E.U. businesses. Digital products are broadly defined in the VAT, meaning when you offer your products to E.U. citizens, this probably is applicable to the products you sell to them.

VAT rates vary among E.U. countries from 15 to 27% - something to keep in mind when pricing your SaaS service for E.U. buyers. If you don't include taxes in your sales on your digital item, it's likely to be expensive compared to E.U. competitors.

Like selling to various states within the U.S., selling to diverse countries of the E.U can be difficult because of tax rates that vary and how they are applied. A few years ago certain SaaS businesses tried to avoid the tax burden by setting up small subsidiaries within E.U. countries. Do not try it now, the VAT has been modified so that it applies to all sellers regardless of location.

Making it right

It's not easy to ensure the online business is conforming to international and local taxes. That's why experts advise partnering with an online commerce platform, a business which specializes in international financial transactions.

An ecommerce platform like stays at the cutting edge of tax laws as well as international laws. This lets you concentrate on developing and selling your service, while handles transactions-related information, such as taxes.

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