Everything You Should Be Aware of Digital VAT and taxes

Do you struggle to keep track of taxation of digital goods in the global marketplace? It's not just you. In the U.S., states were initially slow to adjust to digital download taxation, after which they enacted a flurry of rules. Travel outside in the U.S. and you have even more complicated rulings around 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 and services, to ensure fairness for EU sellers.

There's plenty to take in. And SaaS sellers must get it right or face penalties from both their home country and the countries they do business abroad in. Inability to declare VAT, or use it in a proper manner, could lead to thousands of dollars in penalties, and may even result in the product you offer from sale in some countries.

We'll take a look at ways to comply with tax laws to protect the name of your SaaS firm in selling digital products online.

What qualifies as an electronic good or product?

To make this blog this blog post, we'll identify digital goods as tangible or non-physical goods that exist in digital format. Some examples include:

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

One of the best things with digital items is that because of their digital nature, they are able to easily be replicated and resold without the need for companies to deal with complex manufacturing logistics. In addition, as the vast majority products that are digital exist digitally, customers can easily use the application or the service that they bought quickly, without having to wait for the item to be physically shipped and delivered.

Understanding Taxation Within the United States

States within 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 do not have any the tax on retail sales at all.

Recognizing the increasing prominence of online sales of digital products states such as Alabama, Arizona, Indiana, Louisiana, Maine, New Mexico, Texas, Utah and West Virginia decided to cover digital downloads without modifying the tax laws they already have in place or simply by broadening their definitions that they use to define "tangible personal property" to encompass digital goods.

A number of states have also enacted specific laws that define digital downloads various ways but still subjecting them to taxation such as Colorado, Connecticut, Idaho, Kentucky, Nebraska, New Jersey, South Dakota, Tennessee, Vermont, Washington, and Wisconsin.

However, what businesses selling digital products need to recognize most is the fact that laws governing the sale of digital goods will continue to change. Just take a look at the recent Wayfair state tax Rule. The Supreme Court has ruled that online retailers may be required to collect sales taxes in the states that they conduct business without having a physical brick-and-mortar store. In addition, given that taxes will range from 1% to 7%, keeping track of the "digital products market" isn't easy.

If you believe that you're able to avoid taxation on the sale of digital goods consider reconsidering your position. There is a reason why the U.S. federal government is also paying special attention to digital taxes and may treat the sale of digital goods as a tax-deductible event in the future. In 2011, the Internal Revenue Service (IRS) created the position of Director for Transfer Pricing to investigate the taxation and prices across the country for SaaS services.

Taxation within the European Union

The E.U. introduced the VAT which is applied on all items and services in order so that its citizens are encouraged to prefer E.U. businesses. Digital products are broadly defined by VAT. This means that in the event that you sell your product to E.U. citizens, the VAT probably is applicable to the products you sell to them.

VAT rates can vary between E.U. countries from 15 to 27% - something to keep in mind when pricing your SaaS to E.U. buyers. If you do not account for the taxes, your digital product is going to appear expensive next to E.U. competitors.

Like selling to various states in the U.S., selling to different countries within the E.U is difficult due to tax rates that vary and how they are applied. Some time ago there were a few SaaS businesses tried to avoid this tax problem through the establishment of small subsidiary companies with E.U. countries. Don't try this now; the VAT has been modified so that it applies to all sellers , regardless of location.

Doing it Right

Naturally, it's hard to make sure that your online business is complying with local and international tax regulations. That's why experts suggest partnering with a digital commerce platform - a company that specializes in worldwide financial transactions.

An ecommerce platform like stays in the forefront of tax code as well as international laws. It allows you to concentrate on creating and selling your products, while handling the transactional details like taxes.

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