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Taxes for Digital Products: A Beginner's guide

Apr 18, 2023

Are you growing as a creator-teacher? It's a great thing!

You haven't already thought about taxes?

If you're an online company, the tax obligations of your business are based on many different aspects: the type of items you offer as well as the place you're based and where your clients are located--and this varies depending on the state in which you operate within the US as well as Canada. Needless to say, it's complex.

  Have enough on your plate as a business owner? Get the most important top tax takeaways below.

Taxation's world isn't always easy at the outset. Take the case of America. There is a Streamlined Sales and Use Tax Agreement (SSUTA) gives the details about taxation via digital means; If you look around, you'll notice plenty of variance in the US in the US itself.

The law in Wisconsin, for example states that taxes do not apply to "Live Digital Online Educational Services." In Wisconsin the situation where the students are evaluated by a real person as they take your class as a seminar in real-time or connect your students in real-time, you don't have to pay taxes. In contrast, if your online product is a pre-recorded and computer-generated online courses, or if it contains downloadable files, you may have add taxes.

We'll set the record right: Whether or not you'll need to include taxes in your pricing or not depends the location of your clients, what kind of digital products you sell and how you promote or distribute them, and if you establish a relationship (aka the nexus) with a tax-related jurisdiction.

All this could divert your attention from the most important task making unique content, and ensuring you spread information. That's why we've compiled this blog in order to help you get a better understanding of digital taxation, focused on the US as well as Canada.

Skip ahead:

What's the digital service tax and who needs to pay it?

A digital sales tax (also known as e-commerce or digital transaction tax, also known as digital service tax) is a charge levied on sale of digital items or services. It is used by governments to finance public services and programs. Digital service taxes, by the design, ensure fairness and a level-playing field between brick and mortar businesses and digital businesses. In the end, brick-and-mortar businesses aren't the only ones who need to pay taxes. Likewise, digital sellers find ways to skirt tax laws.

In general terms the majority of governments around the world impose digital service tax by a proportion of the income their citizens make through selling courses or subscriptions. Technically, this is something you, as the creator, add to the price of your digital item. However, calculating it accurately can get confusing.

  Tax on digital products is different across countries and states.  

Even though you can market digital products quickly across borders, the complexities creep in when it comes to handling taxes and billing. Some jurisdictions set minimum revenue thresholds to pay taxes. This means you can be exempt from paying taxes if you make less money than the threshold. To illustrate in mind, let us look at some of the following facts to note:

  • The majority of US states charge sales taxes on digital products and services with the exception of Delaware, Montana, New Hampshire, and Oregon, on certain digital products and services.
  • In Georgia, New York, Pennsylvania In Georgia, New York, Pennsylvania Missouri the majority of digital goods as well as services are tax-deductible. But, you're exempt if you sell eBooks or educational resources.
  • Kansas taxes on all digital products and services with the exception of magazines and newspapers.

What determines whether or not you're subject to tax for digital products?

The need to collect taxes on digital sales is contingent upon many variables. These include:

  • The location of your students The location of your students: If they're in areas where digital goods are not tax-exempt You don't need to incorporate taxes into the price of your products.
  • Type of digital products: Streamable and downloadable content is usually taxed. Some states and countries offer tax exempts on live instruction. Other jurisdictions have different rules for taxation of online advertisements and cloud computing. Certain jurisdictions may punish you for putting your digital goods under the wrong classification. Therefore, it is important ensure that you double-check the tax return, since mistakes could be expensive.
  • Nexus: This is the tax-related relation between the US state and a business. There is a way to create the nexus between two US state through maintaining the presence of a physical location in that state, having employees in that state, or if you meet other requirements that are very different. After you've established a tax nexus, you need to add sales tax on your digital product sales in that particular state. This will be discussed in greater details below.
  • Product bundles: If you offer courses or other items in bundles, and only a small portion of items included in that bundle are tax deductible, then it is important to take care regarding the accuracy of your invoices for the products you sell.
  • Compliance: Digital products are very new to tax professionals in many states, which is why they are revising and reformulating their drafts. To ensure your security, you need to follow up with your jurisdiction's regulations on taxation of digital services and modifications made to them. Also, keep a log of all tax and sales payments.

In addition to the information mentioned above, you should learn more about tax nexus. The reason is that, if you establish a nexus with an US state, you will be required to pay tax on top of the tuition fee in order to make sure you are compliant.

What is the tax connection?

A tax nexus is a relationship between a business and an American taxing jurisdiction. If you're within the US or Canada, you could establish a tax nexus with a US state. It allows you to charge sales tax to clients in that particular state. Alternatively, if you are situated outside of the US, you may be able to establish a nexus when you meet certain thresholds in revenue that originate from the US state (i.e. the majority of your customers are from one specific US area).

Here are a variety ways you can establish the tax nexus between a state:

  • A physical presence is a nexus if reside in a specific US state or possess an employee or office in that specific state, you may qualify for an connection.
  • Affiliate nexus: You can get an affiliate nexus if you are affiliated with an individual or company in the state in which your students enroll using that. In other words that if you operate the ability to refer your students to your online courses through affiliate partnerships with a particular US state, you might have a chance to be considered the relationship. Some states with provisions for the nexus of affiliates include California, Connecticut, Maine, Missouri, etc.

How to determine the location of your clients so that you add taxes properly

If your students spread around the globe, how would you be able to accurately determine the amount of sales tax should be added to the bill?

Knowing the sales data of digital products helps you figure out if you've created the tax nexus. Also, it helps to determine whether your students have to pay sales tax or are exempt depending on which country or state they reside in. There are a variety of methods to determine the sales location of customers include tracking:

  • The billing address is recorded when you onboard customers, you record their country and zip/postal code when they check out. This information helps you determine the need for a double tax.
  • IP address: Your customer IP address can be valuable information to detect their whereabouts. However, Virtual Private Networks (VPNs) as well as other technology often mask it, making them less secure than other methods.
  • Address of the credit card issuer: If your customer's billing address and IP are not in sync, you can source your sales based on the credit card issuer's address. While this doesn't provide exact information regarding the client's place of residence, it's a reliable form of finding out the origin of the sales.
  • Delivery address: It's the gold standard for to determine the sales source. It's a lot more sensible for selling physical items, but it can be difficult to determine when you're selling digital items. People sometimes enter an incorrect address or make payments that are successful because of a number of factors. Therefore, we'd suggest taking this information with a an eye on the ball.

The most accurate methods of finding out the origin of sales is to check the address of the biller as well as the credit card address for the card issuer. If both are in agreement it is possible to add sales tax on your price accordingly.

Overwhelmed? Digital product tax doesn't need to be difficult.

The tax implications of digital technology can feel challenging; we feel you! The complexities of differing rules and regulations across borders will put extra stress for your company. It is a given reality that eventually you'll engage a tax advisor or use a software tool to automate tax collection on the invoices you pay for your courses and subscriptions. In that vein, here are a few things you can do in order to streamline this crucial task for your business:

  • Include taxes in your course pricing after speaking with a tax professional. In your summary of the course that clarifies your price includes tax. It could even make a good selling point as it adds the appearance of transparency.
  • Use TCommerce's leverage. It allows you to check which countries your customers are paying the invoices. The Transaction Report shows the country as well as the zip code. This way, it can be determined whether you have to add taxes to your pricing.

Instead of fretting about the taxes to include on your invoices, use our tax-inclusive software. These platforms, like modern-day creators, offer built-in checkout tools that allows you to raise invoices that include taxes. It is also possible to integrate different tools like:

  • Quaderno: Quaderno helps you create custom fields that can collect data from students during the checkout process (such as the location) It is possible to use Quaderno only if you are using PayPal as well as Stripe. If you're already a member of who uses either, you will get a seven-day free trial to try out Quaderno to see if it works for you.
  • InvoiceBus : InvoiceBus calculates the exact tax amount, but it does not support Stripe.

Wrap up

As an educator of digital creation, there's plenty to accomplish. From planning your informational product to planning marketing, billing, and finances, plus, dealing with tax compliance can become too much.

What makes taxes even more complicated is that the rules always changing around the world. The definition of digital products and how they are taxed evolves across borders. If you're looking to focus on the core of your business(where your time and effort is most crucial) It is recommended to choose a platform that simplifies such compliance-related aspects for you.

Our goal is to make this procedure as easy, simple and as efficient as we can for creators to navigate tax issues directly from our user interface. Discover more information about imposing taxes through our user-friendly platform for creators here.

  Disclaimer: While has put in every effort to make sure that the information on this blog was correct as of the date it was published, does not assume responsibility for readers' choices in tax matters or other actions that result from information contained on this blog.