Everything You Need To Learn About Digital VAT and taxes

Do you struggle to keep track of taxation of digital goods in the global marketplace? There's no need to worry. Within 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. If you travel outside within the U.S. and you have additional complicated rules regarding taxation for digital goods. In particular, countries under the European Union will apply varying amount of Value added Tax (VAT) on all imported digital goods as well as services to ensure fairness for EU sellers.

It's a lot of information to process. It's a lot to take in. SaaS sellers must get it right or face penalties in both their country of origin as well as the countries in which they conduct trade in. Inability to declare VAT or properly apply it, could result in the payment of thousands of dollars of penalties and could lead to your digital product being banned from selling in certain countries.

This article will show you how to comply with tax laws and preserve the reputation of your SaaS company while selling digital goods online.

What qualifies as a digital good or digital product?

To make this blog post We'll define digital goods as intangible physical or non-physical products that exist in digital format. Some examples include:

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

One of the great things about digital products is the fact that, due to their digital nature, they can easily be replicated and resold without the need for companies to deal with complicated manufacturing processes. Additionally, because most items that can be purchased digitally are in digital form, buyers can use the application or the service that they bought quickly, without having to wait for the item to be shipped and delivered.

Understanding Taxation Within 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. In contrast, Alaska, Delaware, Montana, New Hampshire, and Oregon don't have retail sales taxes at all.

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

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

What digital companies need to recognize most is that the laws surrounding the sale of digital goods are likely to evolve. Take a look at the latest Wayfair State Tax ruling. The Supreme Court ruled that internet retailers can be required to collect sales taxes in the states that they conduct business without having a physical brick-and-mortar store. With the added fact that taxes will range between 1% and seven percent and a need to keep track of the "digital products space" could be a challenge.

If you believe that you're able to avoid taxes surrounding the purchase of digital goods, think again. It is important to note that the U.S. federal government is particularly attentive to digital taxes , and might treat the sale of digital products as a taxable event in the future. In 2011, in 2011, the Internal Revenue Service (IRS) established the post of Director for Transfer Pricing to investigate the taxation and prices across the country for SaaS items.

Taxation in the European Union

The E.U. introduced the VAT which is applied to all imports of items and services in order so that its citizens are encouraged to choose E.U. businesses. Digital products are broadly defined as VAT-related, which means in the event that you sell your product to E.U. citizens, it almost certainly will apply to you.

VAT rates vary among E.U. countries ranging from 15 to percent - something you should keep in mind when pricing your SaaS service for E.U. buyers. If you do not take into account taxes on your digital item, it's likely to be expensive compared to E.U. competitors.

Similar to selling to different states inside the U.S., selling to diverse countries of the E.U can be difficult because of tax rates that vary and methods of application. A few years ago there were a few SaaS businesses tried to avoid the tax burden through the establishment of small subsidiary companies with E.U. countries. Don't try this now; the VAT rate has been changed to be applicable to all sellers regardless of location.

Making it right

Obviously, it's difficult to be sure your online business is complying with local and international 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 and international law. It allows you to concentrate on the development and marketing of your product, and also manage transaction-level information like taxes.

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