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Tax for Digital Products: A Beginner's Guide

Apr 18, 2023

Being a creator and educator? It's a great thing!

Have you even already thought about taxes?

As an online business, your tax obligation depends on many different factors: the types of goods you sell and the location of your business as well as where your customers are located--and this varies according to the jurisdictions in the US as well as Canada. Needless to say, it's complicated.

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

Taxation's world isn't always straightforward at the outset. Let's look at the situation in America. The Streamlined Sales and Use Tax Agreement (SSUTA) gives the details about taxation via digital means; if you observe, there's plenty of variance between the US as a whole.

Wisconsin's law, for instance states that taxes do not pertain to "Live Digital Online Educational Services." Thus, in Wisconsin when the students are evaluated by a real person, or you present your class as a live seminar or connect your students in real-time, you don't have to pay tax. In contrast, if your online product is a pre-recorded and computer-generated online courses, as well as if you download files, you may have to add tax.

So, let's set things clear: whether you'll have to add taxes to the price of your products or services depends on where your customers live, what kind of digital goods you offer, how you market or deliver them, and if you establish a relationship (aka the nexus) with a tax jurisdiction.

We know all this can divert your attention from the most important task making unique content, and making sure you share knowledge. We've put together this blog to assist you better understand the world 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?

A digital sales tax (also known as e-commerce or digital transaction tax, or digital tax) is a tax imposed on the internet-based sales of digital goods or services. It is used by governments to finance programs and public services. Digital service taxes, by their design, provide fairness and a level-playing field to brick-and-mortar businesses vis-a-vis digital ones. In the end, brick-and-mortar businesses aren't the only ones to pay taxes. Likewise, digital sellers are able to skirt tax laws.

Generally speaking the majority of governments around the world impose digital service taxes in proportion to the income their citizens make from selling your courses or subscriptions. Technically, this is something you, as an author, add to the price of your digital products. However, calculating it accurately isn't always easy.

  The tax on digital goods differs between states and nations.  

Although you are able to sell digital goods quickly and across countries however, there are complexities the handling of the tax and billing. Certain jurisdictions have the minimum threshold for revenue to be paid taxes. That means that you could be exempt from paying taxes when you earn less than the established threshold. With that there are a few things to consider:

  • The majority of US states levy a sales tax on digital products and services, except for Delaware, Montana, New Hampshire, and Oregon and on certain electronic items as well as services.
  • For Georgia, New York, Pennsylvania in Georgia, New York, Pennsylvania Missouri, most digital products and services are tax deductible. But, you're exempt when you offer eBooks and educational resources.
  • Kansas taxes on all digital products and services with the exception of magazines and newspapers.

What factors determine whether you're liable to charge taxes on digital goods?

The need to pay taxes on your digital product sales depends on many variables. These include:

  • The location of your students The location of your students: If they're in the regions in which digital products are exempted from taxes You don't need to incorporate taxes into your prices.
  • Digital products of various types Content that is streamable or downloaded generally are taxed. Certain states and nations offer tax-free live classes. Some jurisdictions offer different taxes on online ads and cloud computing. Certain jurisdictions may be penalized if you categorize your digital products under the wrong classification. So, you'll need ensure that you double-check your returns, as errors can cost you dearly.
  • Nexus: The nexus is the tax-related connection between a US state and a business. It is possible to establish an nexus with a US state by having an office in the state and having employees working in the state, or by meeting additional criteria which greatly vary. After you've established a tax nexus it is necessary to include the tax of sales on your digital product sales in that particular state. This will be discussed in greater depth below.
  • Product bundles: If you offer classes and other goods in bundles but only a handful of items included in that bundle are tax-deductible, you'll have to think regarding the accuracy of your invoices for the products you sell.
  • Compliance: Digital products are fairly new for tax authorities in many states, which is why they are revising and reformulating their drafts. For your safety be sure to keep the regulations on taxation of digital services and changes made to them and keep track of all tax and sales transactions.

From all the factors discussed above, it's important to learn more about tax nexus. The reason is that, the moment you establish a connection with the US state, then you'll have to include fees on top of your course fee to ensure compliance.

What is an tax Nexus?

A tax nexus can be described as a relationship between a business and an American tax jurisdiction. If you are located within the US and you have a tax nexus, it is possible to establish the tax nexus of the US state. This allows you to apply taxes on sales to customers from that particular state. If you're situated outside of the US, you may create a nexus once you meet certain thresholds in revenue that originate from an US state (i.e. that the majority of your customers come from the same US state).

There are many ways you can establish a tax nexus with the state of

  • Physical presence nexus: If are located in a particular US state, or you have an employee or office in the state of that particular one and you are eligible for a nexus.
  • Affiliate nexus: It is possible to get an affiliate nexus when you're connected to an individual or business in the state and your students are enrolled through this. That is that if you operate an affiliate system which directs your students towards your online class through affiliate connections with a particular US state, you may be eligible for a relationship. States that have provisions for the nexus of affiliates include California, Connecticut, Maine, Missouri, etc.

What is the best way to find the exact location of your customers so that you add taxes properly

Now if your students are spread across the world, how do you be able to accurately determine the amount of sales tax should be added on your invoice?

The information on sales of digital products can help you determine if you've created a tax nexus. This also lets you understand if your students need to pay taxes on sales or are exempt, depending on the state or country they live in. Some ways to detect the sales location of customers are to track them:

  • The billing address is recorded when you take onboard clients, record their country and zip/postal code when they check out. This information helps you determine whether or not you have to pay an additional tax.
  • IP address: Your customers' IP address is valuable information that can be used to pinpoint their whereabouts. However, Virtual Private Networks (VPNs) as well as various other methods often mask it, making it less reliable over other approaches.
  • Address of the credit card issuer If the billing address and IP are not in sync then you may be able to determine the source of your sales using the address of your credit card issuer. Even though this isn't able to provide exact information regarding the client's address, it is regarded as a reliable form of discovering the source of your sales.
  • Delivery address: It's the gold standard for finding out the origin of sales. It's a lot more sensible in the case of physical goods However, it's uncertain when dealing with digital items. Sometimes, people type in an incorrect address and make successful payments for several reasons. Therefore, we'd suggest taking this piece of advice with a grain of salt.

The most precise method of to determine the origin of the sales are the billing and the credit card issuer's address. If they match it is possible to add sales tax on your price in line with.

Overwhelmed? Tax on digital products doesn't necessarily have to be difficult.

Taxes on digital goods isn't easy It's a real struggle! The complex rules and regulations between countries could put additional stress on your business. It is a given reality that eventually you'll hire a tax consultant or use a software tool to streamline tax collection on your invoices for course registrations. In that vein, here are a few tips to make it easier for you to manage this vital task for your business:

  • Include tax in your pricing for courses after talking with a tax professional. In your instruction description that explains your pricing is tax inclusive. It can even be a great selling strategy because it increases clarity.
  • Utilize TCommerce to your advantage. It allows you to check where your customers are paying your invoices from. The Transaction Report displays the country and the zip code, so you can determine whether you have to include taxes in your price.

Instead of worrying about which tax you need to add on your invoices, you can use our tax-inclusive system. Modern-day creator platforms like have built-in checkout that allows you to raise invoices with tax-inclusive taxes. It is also possible to integrate different tools like:

  • Quaderno: Quaderno helps you set up custom fields to collect data from students during the checkout process (such as the location) It is possible to utilize Quaderno only if you are using PayPal or Stripe. If you are a user who uses either, you will get a seven-day trial free of Quaderno and see if it works for you.
  • InvoiceBus : InvoiceBus calculates the correct tax amount but only works with Stripe.

Wrap-Up

As a digital creator educator; there's plenty to accomplish. Beginning with planning the informational product to figuring out marketing, billing, and finances, and over that, managing tax compliance can become difficult.

The reason taxes are so difficult is the fact that tax rules are always changing around the globe. The definition of digital goods and the way they're taxed changes across borders. If you're looking to focus on the core of your business(where your time and energy is most crucial), it's best to choose a platform that can make compliance easier for you.

At , we strive to make this process as simple, easy as well as automated for creators to navigate tax issues using our platform. Discover more information about imposing taxes using our creator-friendly platform here.

  Disclaimer: While has put in every effort to make sure that the information in this blog is correct at the time of publication, does not assume any responsibility for choices in tax matters or other actions that result from the information that is contained in this blog.