Everything You Should Be Aware of Digital VAT and taxes

Struggling to keep up with taxation of digital goods in the global marketplace? There's no need to worry. Within the U.S., states were initially slow to adapt to digital download taxation, then suddenly enacted a wave of rules. If you travel outside within the U.S. and you have much more complex rules regarding the taxation of digital products. For example, countries under the European Union will apply varying amounts of the Value added Tax (VAT) on all imports of digital products and services, to ensure the fairness of EU sellers.

There's plenty to take in. It's a lot to take in. SaaS sellers must get it right or face penalties in both their country of origin as well as the countries in which they conduct business in abroad. The failure to sign up for VAT or use it in a proper manner, could result in hundreds of dollars in penalties and could lead to the product you offer 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 goods online.

What qualifies as a digital good or digital product?

For the purpose of this blog We'll define digital goods as intangible or non-physical goods that exist in electronic form. Some examples include:

• The 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 great things about digital products is the fact that, due to being digital in nature, they can easily reproduced and sold without the need for businesses to manage complicated manufacturing processes. Furthermore, since the majority items that can be purchased digitally are electronically, consumers can use the application or product they purchased quickly, without having to wait for the item to be transported and then delivered.

Understanding Taxation Within the United States

States in the U.S. have a mishmash of tax law governing digital downloads. North Dakota and Washington D.C. don't currently tax digital downloads. However, Alaska, Delaware, Montana, New Hampshire, and Oregon don't have retail sales tax at all.

With the rise of digital goods sold online, many states like Alabama, Arizona, Indiana, Louisiana, Maine, New Mexico, Texas, Utah, and West Virginia decided to cover digital downloads with no modifications to the tax laws they already have in place or simply by broadening their definitions for "tangible personal property" to include digital products.

A number of states have also enacted specific legislation, defining digital downloads in a variety of ways while still subjecting them to taxation which includes Colorado, Connecticut, Idaho, Kentucky, Nebraska, New Jersey, South Dakota, Tennessee, Vermont, Washington, and Wisconsin.

But what digital businesses need to recognize most is that the laws surrounding the sale of digital goods will continue to change. Take a look at the latest Wayfair state tax Ruling. The Supreme Court declared that online sellers can be ordered to collect sales tax in states they do business even though they do not have an actual brick and mortar store. Combined with the fact the tax rates can vary from 1% to 7% and a need to keep track of the "digital product space" can be tricky.

However, if you believe you're able to avoid taxes surrounding the selling of digital products consider reconsidering your position. It is important to note that the U.S. federal government is particularly attentive to digital taxes , and might consider the sale of digital items as a tax-deductible event in the future. In 2011, in 2011, the Internal Revenue Service (IRS) created the position of Director for Transfer Pricing to investigate taxes and costs across the nation for SaaS products.

Taxation within the European Union

The E.U. introduced the VAT which is applied to all imports of goods and services, in order to convince its citizens to buy from E.U. businesses. Digital products can be broadly described 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, ranging from 15 to 27% - something to be aware of when setting the price for your SaaS to E.U. buyers. If you don't take into account taxes on your digital item, it's going to look pricey next to E.U. competitors.

As with selling to states within the U.S., selling to diverse countries of the E.U is difficult due to the variety in tax rates and methods of application. Some time ago certain SaaS companies tried to sidestep the whole tax issue through the establishment of small subsidiary companies in E.U. countries. You shouldn't do this right now. the VAT has been modified to be applicable to all sellers , regardless the location.

Doing it Right

Naturally, it's hard to ensure your digital business is fully complying with local and international tax laws. That's why experts advise partnering with an online commerce platform, a business which specializes in international financial transactions.

A platform for e-commerce that is in the forefront of tax codes as well as international laws. This lets you concentrate on the development and marketing of your service, while handles transaction-level information like taxes.

Ready to see how can change the way you work? Visit this link to get your complimentary trial now!