Everything You Must Be Aware of Digital Taxes and VAT

Do you struggle to keep track of digital tax rules in the world marketplace? It's not just you. In the U.S., states were initially slow to adjust to digital download taxation, but then they suddenly adopted a series of new rules. Venture outside of the U.S. and you have additional complicated rules regarding the taxation of digital items. In particular, countries under the European Union will apply varying amount of Value Added Tax (VAT) on all exported digital products and services in the name of fairness to EU sellers.

It's a lot to absorb. It's a lot to take in. SaaS sellers need to get the basics right, or risk being penalized from both their home country and those they conduct trade in. The failure to sign up for VAT, or use it in a proper manner, could lead to hundreds of dollars in penalties, and may even result in your online product being barred from being sold in specific countries.

Here's a look at how to comply with tax laws to protect the name of your SaaS firm while selling digital goods online.

What qualifies as a digital good or digital product?

To make this blog this blog post, we'll define digital goods as intangible or non-physical goods that exist in electronic form. Some examples include:

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

One of the most appealing aspects regarding digital goods is that due to being digital in nature, they can easily reproduced and sold without the need for businesses to manage complex manufacturing logistics. Furthermore, since the majority items that can be purchased digitally are digitally, customers can easily get access to the program or product they purchased swiftly, without needing to wait around for their product to be transported and then 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. do not currently tax digital downloads. In contrast, Alaska, Delaware, Montana, New Hampshire, and Oregon don't have retail sales tax at all.

In recognition of the growing popularity of digital goods sold online the states of Alabama, Arizona, Indiana, Louisiana, Maine, New Mexico, Texas, Utah as well as West Virginia decided to cover digital downloads, without altering their tax statutes, or by simply broadening their definitions of "tangible personal property" to encompass digital goods.

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

However, what businesses selling digital products should be mindful of the most is the fact that laws governing the sale of digital goods will change. Look at the latest Wayfair State Tax Ruling. The Supreme Court has ruled that online retailers may be ordered to collect sales tax in the states that they conduct business without having a physical brick-and-mortar store. With the added fact the tax rates can vary between 1% and 7percent tracking the "digital products area" isn't easy.

If you believe that you're able to avoid taxes surrounding the selling of digital products, think again. The U.S. federal government is also paying special attention to digital taxation and could consider the sale of digital products as a taxable event at some point in the future. In 2011, in 2011, the Internal Revenue Service (IRS) appointed the Director of Transfer Pricing to investigate nationwide prices and taxation of SaaS products.

Taxation in the European Union

The E.U. introduced the VAT which is applied on all items and services in order to encourage its citizens to prefer E.U. businesses. Digital products can be broadly described in the VAT, meaning in the event that you sell your product to E.U. citizens, it almost certainly will apply to you.

The VAT rates differ between E.U. countries, ranging from 15 to 27 percentage - something that you need to keep in mind when pricing 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.

Similar to selling to different states within the U.S., selling to different countries within the E.U can be difficult because of the variety in tax rates and methods of application. Some time ago there were a few SaaS companies tried to sidestep this tax problem by setting up small subsidiaries with E.U. countries. Don't try this now; the VAT has been modified so that it applies to all sellers , regardless of location.

Making it right

Obviously, it's difficult to make sure that the digital business is fully complying with local and international taxes. That's why experts advise partnering with an online commerce platform, a business that specializes in worldwide financial transactions.

E-commerce platforms like this stay at the cutting edge of tax code as well as international laws. This allows you to focus on creating and selling your product, and also manage the transactional details like taxes.

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