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Taxes On Digital Products: A Beginner's guide

Apr 18, 2023

Growing as a creator educator? That's great news!

But have you thought about your taxes yet?

When you operate an online business the tax liability of an online business is contingent upon a variety of aspects: the type of items you offer, where you're located as well as where your customers are located, and this differs according to the jurisdictions in the US and Canada. It's not surprising that it's complex.

  Are you overwhelmed as an owner of a business? Get the most important key tax-saving tips listed below.

Taxation's world isn't always easy at the start. Consider the example of America. The Streamlined Sales and Use Tax Agreement (SSUTA) provides information about digital taxation; if you observe, there's some variation between the US as a whole.

Wisconsin's law, for instance states that taxes do not have to be paid for "Live digital online educational services." In Wisconsin the situation where an actual human evaluates students, or you present your class as a course in real-time, or you connect with your students via live video the students live, you do not have to pay taxes. If your digital product is pre-recorded, automated online course, and if you have downloadable materials, you could be required to add tax.

We'll set the record clear: whether you'll have to incorporate taxes into the price of your products or services depends the location of your clients, what kind of digital products you sell, how you market or provide them, as well as the extent to which you develop a partnership (aka the nexus) with a tax-related jurisdiction.

All this could distract from your prime responsibilities producing unique content and spreading information. We've put together this blog in order to help you get a better understanding of taxation on digital services that is focused on US as well as Canada.

Skip ahead:

What is a digital service tax, and who needs to contribute to it?

Digital sales tax (also called e-commerce, digital transaction tax, also known as digital service tax) is a charge levied for sale of digital items or services. The government uses it to pay for programs and public services. Digital service tax, by design, offer an equal playing field between brick and mortar businesses and digital businesses. In the end, brick-and-mortar businesses aren't the only ones to collect taxes. On the other hand, digital sellers are able to circumvent tax regulations.

In general terms the majority of governments around the world impose digital service taxes in proportion to the revenue their citizens earn by selling your course or subscriptions. It is a legal requirement that you, as a creator, add to the price of your digital product. However, accurately calculating this could be confusing.

  Taxes on digital items is different across countries and states.  

While you can sell digital products quickly across borders however, there are complexities when it comes to handling the tax and billing. Certain jurisdictions have minimum revenue thresholds to pay taxes. This means you can get tax exemption when you earn less than the established threshold. In that regard, here are some facts to consider:

  • The majority of US states charge sales taxes on digital goods and services except Delaware, Montana, New Hampshire, and Oregon for certain digital products and services.
  • For Georgia, New York, Pennsylvania, and Missouri The majority of digital items and services are tax deductible. But, you're exempt if you sell 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 tax your digital product sales depends on several factors. They include:

  • The place where your students are The location of your students: If they're in the regions in which digital products are exempted from taxes You don't need to add taxes to your prices.
  • Type of digital products streaming and downloadable content generally are taxed. A few states and countries provide tax exemptions for live lessons. Different jurisdictions have their own taxes on online ads and cloud computing. Some may even be penalized if you categorize your digital products under the wrong classification. Therefore, it is important to double-check before filing your returns, as errors can cost you dearly.
  • Nexus: This is the tax-related relation between a US state and an enterprise. You can develop a nexus between a US state by having a physical presence there, having employees in that state, or by meeting additional criteria which greatly vary. Once you establish an nexus for taxation it is necessary to include sales tax to your online merchandise sales within that specific state. This will be discussed in greater detail below.
  • Product bundles: If your offer classes and other goods in bundles and only a handful of products in that bundle are tax deductible, then it is important to take care with regards to the correct invoicing of your product.
  • The compliance aspect of digital products is fairly new for tax authorities in many states, which is why they have been revising and restructuring their drafts. To be safer, you need to follow up with your jurisdiction's taxes on digital services as well as any changes to them. You should also keep a log of all tax and sales payments.

Of all the points mentioned above, you should know a little more about tax the nexus. The reason is that, if you establish a nexus with a US state, you'll have to include taxes on top of your cost of the course to ensure that you're in compliance.

What is an tax connection?

A tax nexus can be described as the relationship between a business and an American taxing jurisdiction. If you're located within the US or Canada, you could establish an tax nexus to a US state. This allows you to apply taxes on sales to customers from that particular state. In addition, even if you're not located in the US You can be able to establish a nexus when you meet certain thresholds in revenue originating in an US State (i.e. the majority of your customers come from the same US state).

Here are a variety options to create the tax nexus between the state of

  • Physical presence nexus: If are located in a particular US state or have an office or employee in that specific state You may be eligible to be the relationship.
  • Affiliate nexus: You may qualify for an affiliate nexus when you're affiliated with an individual or company in the state in which your students sign-up using this relationship. That is, if you have a referral system that directs your students towards your online course through affiliate relationships with a particular US state, you might have a chance to be considered a relationship. Some states with provisions for an affiliate nexus rule are California, Connecticut, Maine, Missouri, etc.

What is the best way to find your customers' location in order to add taxes accurately

If your students span the world, how do you know the exact amount of sales tax should be added on your invoice?

Knowing the sales data of digital products will help determine whether you've established an tax linkage. It also helps you determine if your students need to pay taxes on sales 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 are to track them:

  • Billing address: When you onboard customers, you record their country and zip/postal code at the time of checkout. This helps determine whether or not you have to pay a double tax.
  • IP address: Your customers' IP address is important information to detect their geographical location. However, Virtual Private Networks (VPNs) as well as other technology often mask it, making it less reliable as other techniques.
  • Credit card issuer address: If your customer's billing address and IP do not match then you may be able to determine the source of your sales based on the address of the credit card issuer. Even though this isn't able to provide exact information regarding the client's location, it's considered an accurate method of determining the source of sales.
  • Delivery address: This is the standard method for finding out the origin of sales. But, it's more useful when you sell physical products however, it's sketchy when it comes to digital items. People sometimes enter an incorrect address, and then make a successful payment because of a number of factors. So, we'd recommend taking this information with a some caution.

The most precise method of 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, you can add a sales tax to your pricing according to.

Overwhelmed? Digital product tax doesn't have to be hard

Taxes on digital goods may be a challenge We understand! The complex rules and regulations across borders could put additional stress for your company. It is a given fact that you will eventually engage a tax advisor or use a software tool that automates tax collection for your course subscriptions and invoices. So there are some tips to simplify this essential business activity:

  • Include tax in your course pricing after speaking with a tax consultant. In your summary of the course that clarifies the price is tax-inclusive. It can even serve as a powerful selling tool since it provides clarity.
  • Use TCommerce's leverage. This allows you to see which countries your customers are paying the invoices. The Transaction Report will show the location of the transaction and also the zip code. This way, you can determine whether you have to increase the price of your invoices by adding taxes.

Instead of worrying about which taxes to include on your invoices, you can use our tax-inclusive platform. These platforms, like modern-day creators, offer built-in checkout tools for helping you increase invoices with taxes. It is also possible to integrate other tools, such as:

  • Quaderno: Quaderno helps you set up custom fields to be collected from your students at the checkout process (such as the location) You can utilize Quaderno only when you use PayPal or Stripe. If you're a customer of with either of these services, you can avail a seven-day trial free of Quaderno and see how it performs for you.
  • InvoiceBus : InvoiceBus calculates the proper tax amount, however it does not support Stripe.

Wrap-Up

As an educator in the digital realm, there's a lot to be done. From planning your informational product to working out marketing billing, and finances, as well as managing tax-related compliance can be overwhelming.

What makes taxes even more difficult is the fact that tax rules are frequently changing throughout the globe. After all, the definition of digital goods and the way they are taxed evolves over time and across different countries. If you're trying to concentrate on the core of your business(where your time and energy matter most) It is recommended to choose a platform which can simplify compliance issues for you.

At , we strive to make the process as simple, easy and as efficient as we can to help creators navigate taxes using our platform. Learn more about charging taxes using our creator-friendly platform here.

  Disclaimer: While has taken every precaution to ensure that the information in this blog is accurate as of the date it was published, does not assume the responsibility of choices in tax matters or other actions that result from the information on this blog.