Everything You Need To Be Aware of Digital VAT and Taxes

Do you struggle to keep track of digital taxes in the global market? There's no need to worry. In the U.S., states were at first slow in adjusting to taxation on digital downloads and but then they suddenly adopted a series of new rules. Travel outside within the U.S. and you have much more complex rules regarding the taxation of digital products. As an example, countries under the European Union will apply varying amount of Value Added Tax (VAT) on all imported digital goods and services in the name of fairness to EU sellers.

There's plenty to take in. Also, SaaS sellers must do correct or else face fines in both their country of origin as well as the countries in which they conduct business abroad in. Inability to declare VAT or properly apply it, could lead to thousands of dollars in penalties and could lead to your digital product being banned from being sold in specific countries.

We'll take a look at ways to comply with tax law and preserve the reputation of your SaaS company in selling digital products online.

What counts as digital goods or product?

In this blog We'll describe digital goods as non-tangible or non-physical goods that exist in electronic format. Some examples include:

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

One of the most appealing aspects regarding digital goods is that due to the fact that they are digital, they can easily reproduced and sold without the need for companies to deal with intricate manufacturing logistics. Additionally, because most items that can be purchased digitally are in digital form, buyers can get access to the program or the service that they bought quickly, without having to wait for the item to be shipped and delivered.

The Tax Laws of the United States

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

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

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

What digital companies need to recognize most is the fact that laws governing the selling of digital goods will change. Look at the recent Wayfair state tax Ruling. The Supreme Court ruled that internet retailers can be ordered to collect sales tax within the states they operate even though they do not have an physical brick-and-mortar shop. Combined with the fact that taxes will range between 1% and seven percent tracking the "digital product market" can be tricky.

However, if you believe you are able to afford not paying taxation on the sale of digital goods consider reconsidering your position. The U.S. federal government is also paying special attention to digital taxes and may be able to treat sales of digital products as a taxable event 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 within the European Union

The E.U. created the VAT system, which is applied on all items and services in order so that its citizens are encouraged to choose E.U. businesses. Digital products are generally defined by VAT. This means that in the event that you sell your product to E.U. citizens, it almost certainly will apply to your business.

The VAT rates differ between E.U. countries ranging from 15 to% - something to keep in mind when pricing your SaaS for E.U. buyers. If you fail to account for the taxes the digital products are going to look pricey next to E.U. competitors.

As with selling to states inside the U.S., selling to different countries within the E.U is difficult due to tax rates that vary and methods of application. In the past certain SaaS businesses tried to avoid this tax problem through the establishment of small subsidiary companies within E.U. countries. Don't try this now; the VAT rate has been changed to apply for all sellers, regardless of location.

Making it right

Obviously, it's difficult to ensure the online business is conforming to international and local tax laws. That's why experts advise partnering with an online commerce platform, a business which specializes in international financial transactions.

E-commerce platforms like this stay at the cutting edge of tax codes and international law. This allows you to focus on the development and marketing of your product, and also manage transaction-level information like taxes.

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