Everything You Need To Be Aware of Digital VAT and taxes

Struggling to keep up with taxation of digital goods in the global market? There's no need to worry. In the U.S., states were initially slow to adjust to taxation on digital downloads and but then they suddenly adopted a series of new regulations. Travel outside the U.S. and you have even more complicated rulings around taxation for digital goods. As an example, countries under the European Union will apply varying amounts of the Value added tax (VAT) on all imports of digital products and services to ensure fairness for EU sellers.

It's a lot of information to process. And SaaS sellers must do it right or face penalties in both their country of origin as well as the countries in which they conduct business abroad in. Inability to declare VAT or apply it correctly, can cause hundreds of dollars in fines and even lead to your digital product being banned from sale in some countries.

Here's a look at how to comply with tax laws and preserve the reputation of your SaaS firm in selling digital goods on the internet.

What qualifies as digital goods or product?

In this blog We'll identify digital goods as tangible or non-physical goods that exist in digital format. Some examples include:

• Software downloaded (photo editors DJ software.)
• Digital assets (ebooks, image files, audio clips/audio files, movies or digital video)
• Web applications/Software as a Service (SaaS)

One of the best things about digital products is that because of their digital nature, they can easily be replicated and resold without the need for businesses to manage complex manufacturing logistics. Additionally, because most of these digital goods exist in digital form, buyers can access the software or the service that they bought swiftly, without needing to wait for the item to be transported and then delivered.

The Tax Laws of the United States

States across the U.S. have a mishmash of digital tax laws. North Dakota and Washington D.C. don't currently tax digital downloads. While Alaska, Delaware, Montana, New Hampshire, and Oregon aren't subject to retail sales taxes at all.

With the rise 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, without altering their tax statutes, or by simply expanding the definition that they use to define "tangible personal property" to encompass digital goods.

A number of states have also enacted specific laws that define digital downloads various ways but still subjecting them to taxation 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 laws surrounding the sale of digital goods will continue to change. Take a look at the recent Wayfair state tax Rule. The Supreme Court declared that online sellers can be required to collect sales taxes within the states they operate even though they do not have an physical brick-and-mortar shop. Combined with the fact that tax rates will vary from 1% to 7percent, keeping track of the "digital products market" could be a challenge.

But if you think that you are able to afford not paying taxes surrounding the purchase of digital goods consider reconsidering your position. The U.S. federal government is also paying special attention to digital taxes , and might consider the sale of digital goods as an event that is tax-deductible in the near 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 imported products and services in order to convince its citizens to prefer E.U. businesses. Digital products are broadly defined by VAT. This means that when you offer your products to E.U. citizens, it almost certainly is applicable to the products you sell to them.

VAT rates can vary between E.U. countries ranging from 15 to percentage - something that you need to be aware of when setting the price for your SaaS for E.U. buyers. If you don't include taxes in your sales the digital products are going to look pricey next to E.U. competitors.

As with selling to states within the U.S., selling to different countries within the E.U can be difficult because of tax rates that vary and the way they're applied. Some time ago there were a few SaaS businesses tried to avoid the whole tax issue through the establishment of small subsidiary companies in E.U. countries. Do not try it now, the VAT has been modified to apply for all sellers, regardless the location.

Making it right

Obviously, it's difficult to be sure the online business is complying with local and international taxes. That's why experts recommend partnering with a digital commerce platform, a business which specializes in international financial transactions.

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

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