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Tax on Digital Products: A Beginner's How-to

Apr 18, 2023

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

But have you considered your tax preparation yet?

When you operate an online business the tax liability of an online business is contingent on many different variables: the kinds of goods you sell as well as the place you're based, where your customers are located, and this differs according to the jurisdictions in the US as well as Canada. It's not surprising that it's complex.

  Do you have enough to do as an owner of a business? Learn the most crucial top tax takeaways below.

The world of taxation isn't always easy at the beginning. Consider the example of America. Its Streamlined Sales and Use Tax Agreement (SSUTA) provides the details about taxation via digital means; if you observe, there's quite a bit of variation in the US in the US itself.

For instance, Wisconsin's law it clarifies that tax laws don't apply to "Live Interactive Online Education Services." In Wisconsin, in circumstances where the students are evaluated by a real person, or you present your live seminar and you interact with your students live and in real-time, you aren't required to pay tax. Alternatively, if your digital course is recorded and an automated online course or if it contains downloadable materials, you could be required add taxes.

So, let's set things right: Whether or not you'll need to add taxes to your pricing or not depends the location of your clients in the world, the type of digital items you offer the way you market them or deliver them, and if you establish a relationship (aka the nexus) with a tax authority.

It is well-known that all this may divert your attention from the most important task - creating unique content and making sure you share the knowledge. That's why we've compiled this blog in order to help you get a better understanding of digital service tax, focused on the US as well as Canada.

Skip ahead:

What exactly is the digital service tax and who needs to pay for it?

Digital sales tax (also called e-commerce, digital transaction tax, also known as digital tax) is a charge levied on internet-based sales of digital goods or services. It is used by governments to finance programs and services for the public. Digital service taxes, by the design, ensure equality and fairness for brick-and-mortar companies versus digital businesses. In the end, brick-and-mortar businesses aren't the only ones who need to pay taxes. Likewise, online sellers can find ways to skirt tax laws.

Generally speaking generally, the vast majority of countries worldwide levie digital service taxes in proportion to the income their citizens make from selling your courses or subscriptions. Technically, this is something you, as a creator will add to the value of your digital item. However, calculating it accurately could be confusing.

  Tax on digital products varies across states and countries.  

Although you are able to sell digital goods quickly and across countries however, there are complexities the handling of billing and taxation. Some jurisdictions set minimal revenue thresholds for paying taxes. That means that you could be exempt from paying taxes in the event that you earn less than the established threshold. To illustrate, here are some facts to note:

  • The majority of US states have taxes on sales of digital products and services except Delaware, Montana, New Hampshire and Oregon and on certain electronic items and services.
  • In Georgia, New York, Pennsylvania, and Missouri the majority of digital goods and services are tax deductible. However, you are exempted if you sell eBooks or educational materials.
  • Kansas taxes on all digital products and services with the exception of magazines and newspapers.

What is the criteria for determining whether you're liable to charge tax for digital products?

Whether or not you need to collect taxes on digital product sales depends on many aspects. They include:

  • The location of your students In the regions in which digital products are not tax-exempt You don't need to include taxes in your prices.
  • Type of digital products streaming and downloadable content generally are taxed. A few states and countries provide tax exemptions for live lessons. Other jurisdictions have different tax governance regarding online advertising as well as cloud computing. Certain jurisdictions may be penalized if you categorize your digital goods under the wrong category. Therefore, it is important be sure to check before filing the tax return, since errors can cost you dearly.
  • Nexus: It is the tax-related relationship between a US state and an enterprise. There is a way to create an nexus with a US state by having the presence of a physical location in that state and having employees working in the state, or if you meet other criteria which greatly vary. When you have established a tax nexus it is necessary to include sales tax on your digital products sold in the specific state. This is covered in greater details below.
  • Product bundles: If your offer courses or other items in bundles, and only a small portion of items in the bundle are taxable, it is important to take care with regards to the correct invoicing of your product.
  • The compliance aspect of digital products is relatively new to tax officials in many states, which is why they have been revising and restructuring their drafts. To ensure your security it is essential to keep up with your jurisdiction's taxes on digital services as well as changes made to them and keep a record of all sales and tax-related payment.

From all the factors mentioned above, you should learn more about tax the nexus. This is because when you establish a nexus with the US state, then you'll need to add fees on top of your course fee to ensure compliance.

What is an tax nexus?

A tax nexus can be described as the relationship between a business and an American taxing jurisdiction. If you are located within the US and you have a tax nexus, it is possible to establish a tax nexus with the US state. This allows you to apply sales tax to clients in that particular state. Alternatively, if you are situated outside of the US it is possible to establish a nexus if you exceed certain income thresholds that originate from a US State (i.e. the majority of your clients are located in one specific US area).

Here are a variety of ways to establish a tax nexus with the state of

  • A physical presence is a nexus if reside in a specific US state or have an office or employee in that specific state You may be eligible to be the relationship.
  • Affiliate nexus: You may be eligible for affiliate nexus when you're affiliated with an individual or business in the state, and you have students sign-up using this relationship. Also that if you operate the ability to refer your students to your online course through affiliate relationships based in a particular US state, then you could qualify for the connection. Some states with provisions for an affiliate nexus requirement are California, Connecticut, Maine, Missouri, etc.

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

Now if your students span the globe, how would you know the exact amount of sales tax should be added to the bill?

The information on sales of digital products helps you figure out if you have established a tax connection. Also, it helps to determine whether your students have to pay taxes on sales or are exempt from paying taxes, based upon the country, state or state they are in. Some ways to detect the sales location of customers include tracking:

  • Billing address: When you onboard customers, you note their country, zip/postal code when they check out. This information helps you determine the need for a double tax.
  • IP address: Your customers' IP address is valuable data to determine their exact geographical location. However, Virtual Private Networks (VPNs) as well as various other methods typically hide this information, making it less reliable as other techniques.
  • Credit card issuer address If the customer's billing address and IP don't match then you may be able to determine the source of your sales by relying on the credit card issuer's address. While this doesn't provide accurate information about the customer's address, it is regarded as to be a valid method for determining the source of sales.
  • Delivery address: It's the most reliable method of determining the source of sales. But, it's more useful in the case of physical goods, but it can be sketchy when it comes to digital products. People sometimes enter an incorrect address or make payments that are successful due to a variety of reasons. Therefore, we'd suggest taking this bit of information with a grain of salt.

The most accurate methods of to determine the origin of the sales is by comparing the invoice as well as the credit card address of the issuer. If they match, you can add a sales tax on your price accordingly.

Overwhelmed? Digital product tax doesn't necessarily have to be difficult.

Taxes on digital goods may be a challenge We understand! The complexities of differing laws and regulations in different countries can add an additional burden for businesses. You can't get around the possibility that you'll eventually employ a tax professional or utilize a tool to streamline tax collection on your invoices for course registrations. In that vein Here are a few things you can do to simplify this essential task for your business:

  • Include tax in your course pricing after speaking to a tax advisor. In your summary of the course that clarifies your pricing is tax inclusive. This could serve as a powerful selling tool because it increases transparency.
  • Use TCommerce's leverage. This allows you to see the location where customers pay your invoices from. The Transaction Report displays the country as well as the zip code so that you can determine whether or not you must include taxes in your price.

Instead of worrying about which taxes you should add to invoices, you can use our tax-inclusive platform. Modern-day creator platforms like include built-in checkout features that allows you to raise invoices with taxes. Additionally, you can integrate additional tools, like:

  • Quaderno: Quaderno helps you design custom fields to be collected from students during payment (such as location) You can make use of Quaderno only if you are using PayPal or Stripe. If you're a customer of with either of these services, you can avail a seven-day trial for free to test Quaderno to see whether it is a good fit for your needs.
  • InvoiceBus : InvoiceBus calculates the proper tax amount, however it does not support Stripe.

Wrap up

As a digital creator educator; there's plenty to accomplish. Starting with the planning of your infographic to working out marketing billing, and finances, and over that, managing tax compliance can become overwhelming.

What makes taxes even more challenging is that rules are always changing around the globe. In the end, the meaning of digital services and how they're taxed changes over time and across different countries. If you're trying to concentrate on your core business(where your time and energy matter most) It is recommended to choose a platform which can simplify compliance issues for you.

We strive to make the procedure as easy, simple as well as automated for creators to navigate tax issues using our platform. Find out more about tax charging by using our platform that is user-friendly for creators.

  Disclaimer: Although we have put in every effort to make sure that the information contained in this blog is accurate as of the date it was published, does not assume any responsibility for choices in tax matters or other actions that result from the information in this blog.