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Tax for Digital Products: A Beginner's Guide

Apr 18, 2023

Are you growing as a creator-teacher? It's a great thing!

Have you even considered your tax preparation yet?

When you operate an online business the tax liability of an online business is contingent on a lot of different variables: the kinds of products you sell and the location of your business as well as where your customers are located and the tax implications vary by jurisdiction across the US and Canada. It's not surprising that it's complicated.

  Have enough on your plate as a business owner? Learn the most crucial key tax-saving tips listed below.

Taxation's world can be confusing at beginning. Consider the example of America. Its Streamlined Sales and Use Tax Agreement (SSUTA) gives the details about taxation via digital means; If you look around, you'll notice some variation within the US as a whole.

The law in Wisconsin, for example, clarifies that taxes don't apply to "Live digital online educational services." Thus, in Wisconsin when an actual human evaluates students, or you present your course as a seminar in real-time or connect your students via live video and in real-time, you aren't required to pay taxes. In contrast, if your online product is a pre-recorded and computer-generated online courses, and if you have downloadable files, you may have to add tax.

Let's get things straight: Whether you'll need to incorporate taxes into the price of your products or services depends the location of your clients and what type of digital items you offer, how you market or deliver them, and if you establish a relationship (aka the nexus) with a tax authority.

We know all this can distract from your prime responsibilities making unique content, and spreading knowledge. We've put together this blog in order to help you get a better understanding of digital service tax with a focus on the US as well as Canada.

Skip ahead:

What's an electronic service tax and who is required to pay it?

A digital sales tax (also called e-commerce, digital transaction tax, or digital service tax) is a tax imposed on the sale of digital items or services. It is used by governments to finance programs and public services. Digital service taxes, by the design, ensure equality and fairness between brick and mortar businesses and digital businesses. Since the latter aren't the only ones to add taxes, while digital sellers find ways to circumvent tax regulations.

Generally speaking generally, the vast majority of countries worldwide levie tax on digital services as a percentage of the income their citizens make from selling your courses or subscriptions. In practice, it is something you, as an author can add to the cost of your digital products. However, calculating it accurately could be confusing.

  Tax on digital products differs between states and nations.  

Even though you can market digital products quickly across borders however, there are complexities the handling of taxes and billing. A few jurisdictions establish minimum revenue thresholds to pay taxes. In other words, you may not be taxed if you make less money than the threshold. With that in mind, let us look at some of the following facts to take note of:

  • Most US states charge taxes on sales of digital goods and services, except for Delaware, Montana, New Hampshire as well as Oregon for certain digital items and services.
  • In Georgia, New York, Pennsylvania, and Missouri the majority of digital goods as well as services are tax-deductible. However, you are exempted selling eBooks or educational materials.
  • Kansas taxes all digital goods and services other than magazines and newspapers.

What factors determine whether you're liable to charge tax on digital products?

The need to collect taxes on digital sales is contingent upon several aspects. They include:

  • The place where your students are In the regions in which digital products are tax-free, you don't have to include taxes in the price of your products.
  • Type of digital products: Streamable and downloadable content generally are taxed. Some states and countries offer tax-free live classes. Different jurisdictions have their own tax governance regarding online advertising as well as cloud computing. There are some that could punish you for putting your online products in the wrong category. So, you'll need ensure that you double-check tax returns because mistakes can be costly.
  • Nexus: It is the tax-related relation between a US state and an enterprise. There is a way to create the nexus between two US state through maintaining the presence of a physical location in that state and having employees working in the state, or meeting other conditions that can be very diverse. After you've established a tax nexus then you must add the tax of sales on your digital merchandise sales within that specific state. This will be discussed in greater detail below.
  • Product bundles: If you sell courses and other products in bundles, and only a few of the items in the bundle are tax-deductible, you'll need to be careful with regards to the correct invoicing of your product.
  • Compliance: Digital products are very new to tax professionals as well as many states are revising and reformulating their drafts. For your safety it is essential to keep up with your jurisdiction's taxes on digital services as well as modifications made to them. Also, keep a record of any tax and sales payments.

From all the factors discussed above, it's important to know a little more about tax Nexus. It is due to the fact that if you establish a nexus with a US state, you'll need to add taxes on top of your tuition fee in order to make sure you are compliant.

What is a tax connection?

A tax nexus can be described as the relationship between a business and an American tax jurisdiction. If you are located in the US and you have a tax nexus, it is possible to establish the tax nexus of the US state. It allows you to charge sales tax to clients in that particular state. Alternatively, if you are not located in the US it is possible to create a nexus once you exceed certain income thresholds which originate in the US state (i.e. the majority of your customers are from the same US area).

Here are a variety options to create a tax nexus with a state:

  • Physical presence nexus: If you are located in a particular US state or have employees or offices in that specific state You may be eligible to be a connection.
  • Affiliate nexus: You can be eligible for affiliate nexus in the event that you're connected to an individual or business in the state, and you have students enroll using that. That is, if you have the ability to refer your students to the online courses through affiliate partnerships with a particular US state, you might be eligible for an relationship. States that have provisions for the nexus of affiliates include California, Connecticut, Maine, Missouri, etc.

What is the best way to find your customers' location to ensure that taxes are added correctly

Now if your students spread around the globe, how would you know the exact amount of sales tax to add to your bill?

The information on sales of digital products helps you figure out if you've created an tax linkage. This also lets you understand if your students need to pay sales tax or are exempt from paying taxes, based upon the country, state or state they reside in. There are a variety of methods to determine the sales location of customers include tracking:

  • The billing address is recorded when you onboard customers, you keep track of their country and postal zip code at the time of checkout. This helps determine whether you need to pay an additional tax.
  • IP address: Your customer IP address can be valuable data to determine their exact whereabouts. However, Virtual Private Networks (VPNs) as well as other technology typically hide this information, making it less trustworthy over other approaches.
  • Credit card issuer's address: If your customer's billing address and the IP address don't match it is possible to source your sales by relying on the credit card issuer's address. While this doesn't provide exact information regarding the client's location, it's considered a reliable form of determining the source of the sales.
  • Delivery address: This is the gold standard for to determine the sales source. It's a lot more sensible for selling physical items however, it's uncertain when dealing with digital items. Sometimes, people type in an incorrect address, and then make a successful payment due to a variety of reasons. Hence, we'd say take this bit of information with an eye on the ball.

The most reliable methods for finding out the origin of sales are the billing and the credit card address for the card issuer. If both are in agreement then you are able to add sales tax on your price accordingly.

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

Taxes on digital goods can feel challenging We understand! The complexity of different rules and regulations across borders can add an additional burden for your company. You can't get around the reality that eventually you'll engage a tax advisor or employ a software program that automates tax collection for the invoices you pay for your courses and subscriptions. So there are some ways to make it easier for you to manage this vital task for your business:

  • Incorporate taxes into the price of your course after having a conversation with a tax consultant. Include a note in the course description which clarifies that your price includes tax. This could be a great selling strategy since it provides clarity.
  • Leverage TCommerce. It lets you know where your customers are paying their invoices. The Transaction Report will show the location of the transaction and also the zip code, so you can determine if you are obligated to add taxes to your pricing.

Instead of fretting about the taxes you should add to your invoices, use our tax-inclusive software. The most modern creator platforms have built-in checkout to help you raise invoices with taxes. It is also possible to integrate additional tools, like:

  • Quaderno: Quaderno helps you create custom fields that can be collected from your students at checkout (such as the location) The ability to make use of Quaderno exclusively when you're using PayPal and Stripe. If you are a user with either of these services, you can avail a seven-day trial for free to test Quaderno and see how it performs for you.
  • InvoiceBus : InvoiceBus calculates the proper tax amount, however it only works with Stripe.

Wrap up

As a digital creator educator; there's much to do. From planning your informational product to planning marketing, financials, and billing and over that, managing tax-related compliance can be difficult.

The reason taxes are so challenging is that rules are always changing around the world. After all, the definition of digital services and how they're taxed changes globally. If you're planning to concentrate on the core of your business(where your time and energy is most crucial) It is recommended to pick a system which can simplify compliance issues for you.

Our goal is to make this process as smooth, intuitive and as efficient as we can in order to assist creators with tax planning right from our interface. Learn more about charging taxes through our user-friendly platform for creators here.

  Disclaimer: Though we've taken every precaution to ensure that the information contained in this blog was correct as of the date it was published, does not assume any responsibility for fiscal decisions or actions that arise from information contained in this blog.