Everything You Need To Be Aware of Digital Taxes and the VAT

Do you struggle to keep track of digital taxes in the global marketplace? It's not just you. Within the U.S., states were initially slow to adjust to the taxation of digital downloads, then suddenly enacted a wave of new rules. If you 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 quantities of Value added tax (VAT) on all imports of digital products and services in the name of fairness to EU sellers.

It's a lot of information to process. Also, SaaS sellers must get it right or face penalties from both their home country and the countries they do trade in. Failure to register for VAT or use it in a proper manner, could cause hundreds of dollars in fines and even lead to the product you offer from being sold in specific countries.

Here's a look at how to comply with tax laws and protect the image of your SaaS business while selling digital products online.

What counts as an electronic good or product?

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

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

One of the most appealing aspects with digital items is the fact that, due to the fact that they are digital, they can easily be reproduced and resold without requiring businesses to navigate complex manufacturing logistics. In addition, as the vast majority of these digital goods exist in digital form, buyers can get access to the program or the service that they bought swiftly, without needing to wait for an item to be transported and then delivered.

Understanding Taxation Within the United States

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

Recognizing the increasing prominence of electronic goods that are sold online the states of Alabama, Arizona, Indiana, Louisiana, Maine, New Mexico, Texas, Utah, and West Virginia decided to cover digital downloads, without altering their existing tax statutes or by simply expanding their definitions for "tangible personal property" to include digital products.

Numerous other states have enacted specific laws that define digital downloads in various ways, but always subjecting them to taxation which includes Colorado, Connecticut, Idaho, Kentucky, Nebraska, New Jersey, South Dakota, Tennessee, Vermont, Washington and Wisconsin.

But what digital businesses must be aware of is that the laws surrounding the selling of digital goods will continue to change. Take a look at the latest Wayfair state tax Ruling. The Supreme Court declared that online sellers can be required to collect sales taxes in the states that they conduct business in despite not having an actual brick and mortar store. With the added fact that tax rates will vary between 1% and seven percent tracking the "digital products area" can be tricky.

If you believe that you can afford to ignore taxation on the sale of digital goods, think again. There is a reason why the U.S. federal government is also paying special attention to digital taxes , and might be able to treat sales of digital goods as an event that is tax-deductible at some point in the future. In 2011 The Internal Revenue Service (IRS) established the post of Director of Transfer Pricing to investigate taxes and costs across the nation for SaaS products.

Taxation in the European Union

The E.U. introduced the VAT that applies to all imports of products and services to encourage its citizens to buy from E.U. businesses. Digital products can be broadly described as VAT-related, which means in the event that you sell your product 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 27 percentage - something that you need to be aware of when setting the price for your SaaS for E.U. buyers. If you fail to take into account taxes on your digital item, it's going to appear expensive next to E.U. competitors.

As with selling to states inside the U.S., selling to different countries within the E.U is challenging because of the different tax rates and methods of application. Some time ago, some SaaS firms tried to circumvent this tax problem through the establishment of small subsidiary companies with E.U. countries. Don't try this now; the VAT has been modified to be applicable for all sellers, regardless of their location.

Doing it Right

It's not easy to be sure the digital enterprise is in compliance with both international and local tax regulations. 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 laws and international law. It allows you to concentrate on the development and marketing of your products, while handling transactions-related information, such as taxes.

Ready to see how can change the way you work? Click here to get your complimentary trial now!