Creative tips and tricks

Tax On Digital Products: A Beginner's Guide

Apr 18, 2023

Growing as a creator educator? This is great news!

Have you even considered your tax preparation yet?

When you operate an online business the tax obligations of your business are based on many different variables: the kinds of products you sell and the location of your business and where your clients are located, and this differs by jurisdiction across the US as well as Canada. Needless to say, it's complicated.

  Have enough on your plate as an owner of a business? Learn the most crucial most important tax tips below.

The world of taxation can be confusing at start. Take the case of America. There is a Streamlined Sales and Use Tax Agreement (SSUTA) provides the details about taxation via digital means; if you observe, there's quite a bit of variation between the US as a whole.

The law in Wisconsin, for example states that taxes do not have to be paid for "Live digital online educational services." Therefore, in Wisconsin, in circumstances where an actual human evaluates students and you deliver your class as a seminar in real-time, or you connect with your students live the students live, you do not have to pay tax. Alternatively, if your digital product is a pre-recorded and computer-generated online courses, or if it contains downloadable files, you may have add taxes.

So, let's set things right: Whether or not you'll need to add taxes to the price of your products or services depends on where your customers live, what kind of digital goods you offer and how you promote or deliver them, and whether you have a connection (aka"nexus") with a tax authority.

It is well-known that all this may distract from your prime responsibilities making unique content, and making sure you share knowledge. We've put together this blog in order to help you better understand the world of taxation on digital services that is focused on US and Canada.

Skip ahead:

What exactly is the digital service tax and who is required to pay it?

A digital sales tax (also called e-commerce, digital transaction tax, also known as digital tax) is an amount imposed for sale of digital items or services. The government uses it to pay for public services and programs. Digital service tax, by design, offer an equal playing field for brick-and-mortar companies versus digital ones. In the end, brick-and-mortar businesses should not be the only ones to pay taxes. Likewise, digital sellers find ways to get around tax rules.

Generally speaking, most governments worldwide levy tax on digital services as a percentage of the revenue their citizens earn through selling courses or subscriptions. In practice, it is something you, as an author will add to the value of your digital products. However, calculating it accurately could be confusing.

  Taxes on digital items differs between states and nations.  

Although you are able to sell digital goods quickly and across countries however, there are complexities with regards to billing and taxation. A few jurisdictions establish the minimum threshold for revenue to be paid taxes. This means you can get tax exemption in the event that you earn less than the set threshold. With that in mind, let us look at some of the following facts to take note of:

  • Nearly all US states have sales taxes on digital goods and services except Delaware, Montana, New Hampshire and Oregon, on certain digital items and services.
  • In Georgia, New York, Pennsylvania, and Missouri, most digital products and services are tax deductible. But, you're exempt selling eBooks or educational materials.
  • Kansas taxes all digital goods and services other than magazines and newspapers.

What factors determine the extent to which you're required to charge taxes on digital goods?

Whether or not you need to pay taxes on your digital sales is contingent upon various variables. They include:

  • Your students' location In the regions in which digital products are exempted from taxes, you don't have to include taxes in your pricing.
  • Digital products of various types streaming and downloadable content generally are taxed. A few states and countries provide tax exempts on live instruction. Different jurisdictions have their own tax governance regarding online advertising and cloud computing. There are some that could punish you for putting your online products in the wrong category. Therefore, it is important ensure that you double-check your returns, as mistakes could be expensive.
  • Nexus: The nexus is the tax-related relation between a US state and an enterprise. You can develop a nexus between a US state by maintaining a physical presence there, having employees in that state, or by meeting additional criteria which greatly vary. After you've established an nexus for taxation then you must add the tax of sales on your digital product sales in that particular state. This will be discussed in greater detail below.
  • Product bundles: If you offer classes and other goods in bundles but 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 your product.
  • The compliance aspect of digital products is very new to tax professionals as well as many states are revising and reformulating their drafts. To ensure your security it is essential to keep closely with the state's taxes on digital services as well as any changes to them. You should also keep a log of all tax and sales payments.

From all the factors discussed above, it's important to know a little more about tax the nexus. The reason is that, the moment you establish a connection with an US state, then you'll have to include tax on top of the cost of the course to ensure that you're in compliance.

What is a tax connection?

A tax nexus is a relationship between a business and an American tax jurisdiction. If you are located within the US, you may develop the tax nexus of a US state. This allows you to apply sales taxes to customers in that particular state. In addition, even if you're not located in the US it is possible to establish a nexus if you meet certain thresholds in revenue which originate in the US states (i.e., most of your clients are located in one specific US area).

Here are a number ways you can establish a tax nexus with a state:

  • The physical presence of a person: If you are located in a particular US state or have an employee or office in the state of that particular one, you may qualify for a nexus.
  • Affiliate nexus: You may qualify for an affiliate nexus in the event that you're 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 the online course through affiliate relationships that are based in a specific US state, then you could have a chance to be considered an connection. The states that are subject to an affiliate nexus requirement are California, Connecticut, Maine, Missouri, etc.

How do you determine the exact location of your customers in order to add taxes accurately

If your students spread around the world, how do you be able to accurately determine the amount of sales tax you should add on your invoice?

Identifying digital product sales information will help determine whether you've established the tax connection. This also lets you understand if your students need to pay sales taxes or are exempt, depending on which country or state they live in. Some ways to detect the location of sales for customers include tracking:

  • Address for billing: If you are onboard with customers, note their country, zip/postal code during checkout. This helps determine whether or not you have to pay an additional tax.
  • IP address: The customer's IP address can be valuable data to determine their exact geographical location. But, Virtual Private Networks (VPNs) as well as other technology frequently hide it, which makes them less secure as other techniques.
  • Credit card issuer address If the billing address and IP address do not match, you can source your sales based on the credit card issuer's address. Even though this isn't able to provide exact information regarding the client's address, it is regarded as a reliable form of determining the source of the sales.
  • Delivery address: It's the most reliable method of to determine the sales source. But, it's more useful when you sell physical products however, it's uncertain when dealing with digital products. Some people enter the wrong address, and then make a successful payment because of a number of factors. Therefore, we'd suggest taking this information with a an eye on the ball.

The most reliable methods for determining the source of sales is to check the address of the biller and 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 necessarily have to be difficult.

The tax implications of digital technology may be a challenge It's a real struggle! The complexity of different laws and regulations in different countries can add an additional burden on your business. There is no escaping the reality that eventually you'll engage a tax advisor or employ a software program to streamline tax collection on your course subscriptions and invoices. So Here are a few ways to make it easier for you to manage this vital task for your business:

  • Include tax in the price of your course after having a conversation to a tax advisor. Include a note in the instruction description that explains your pricing is tax inclusive. It can even be a great selling strategy since it provides transparency.
  • Use TCommerce's leverage. It lets you know the location where customers pay your invoices from. The Transaction Report displays the location of the transaction and also the zip code so that you can determine if you are obligated to increase the price of your invoices by adding taxes.

Instead of stressing about what tax you need to add to your invoices, make use of our tax-inclusive software. These platforms, like modern-day creators, have built-in checkout that allows you to raise invoices with taxes. Additionally, you can integrate other tools, such as:

  • Quaderno: Quaderno helps you design custom fields to be collected from your students at payment (such as location) It is possible to utilize Quaderno only if you are using PayPal or Stripe. If you're a customer of with either of these services, you can avail a seven-day free trial to try out Quaderno and see if it works for you.
  • InvoiceBus : InvoiceBus calculates the proper tax amount, however it does not support Stripe.

Wrap up

As a digital creator educator; there's plenty to accomplish. Beginning with planning the informational product to figuring out marketing, financials, and billing plus, dealing with tax-related compliance can be overwhelming.

What makes taxes even more complicated is that the rules always changing around the globe. After all, the definition of digital services and how they're taxed is constantly evolving across borders. If you're trying to concentrate on your core business(where your efforts and time are most important) It is recommended to choose a platform that simplifies such compliance-related aspects for you.

We strive to make the tax process as smooth, intuitive and as efficient as we can for creators to navigate tax issues using our platform. Discover more information about imposing taxes by using our platform that is user-friendly for creators.

  Disclaimer: Though we've made every effort to ensure that the information on this blog is correct as of the date it was published but does not accept responsibility for readers' choices in tax matters or other actions that result from information contained in this blog.