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Taxes on Digital Products: A Beginner's Guide

Apr 18, 2023

Growing as a creator educator? This is great news!

But have you already thought about taxes?

If you're an online company, your tax obligation depends upon a variety of variables: the kinds of items you offer as well as the place you're based and where your clients are located, and this differs depending on the state in which you operate within the US and Canada. It's not surprising that it's complex.

  Are you overwhelmed as a business owner? Get the most important top tax takeaways below.

Taxation's world can be confusing at start. Let's look at the situation in America. The Streamlined Sales and Use Tax Agreement (SSUTA) provides information about digital taxation; If you examine, there's quite a bit of variation within the US in the US itself.

Wisconsin's law, for instance, clarifies that taxes don't pertain to "Live digital online educational services." In Wisconsin, in circumstances where an actual human evaluates students as they take your course as a live seminar and you interact with your students via live video, you don't have to pay taxes. Alternatively, if your digital product is pre-recorded, an automated online course and if you have downloadable files, you may have add taxes.

So, let's set things straight: Whether you'll need to include taxes in your prices or not is contingent the location of your clients, what kind of digital products you sell the way you market them or deliver them, and if you establish a relationship (aka the nexus) with a tax-related jurisdiction.

All this could distract from your prime responsibilities making unique content, and making sure you share knowledge. That's why we've compiled this blog to help you better understand the world of taxation on digital services with a focus on the US and Canada.

Skip ahead:

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

A digital sales tax (also known as e-commerce or digital transaction tax, or digital service tax) is a tax imposed on sale of digital items or services. The government uses it to pay for programs and public services. Digital taxation, through the design, ensure equality and fairness between brick and mortar businesses and digital businesses. After all, the former should not be the only ones to add taxes, while digital sellers find ways to skirt tax laws.

In general terms the majority of governments around the world impose digital service taxes in proportion to the revenue their citizens earn through selling courses or subscriptions. It is a legal requirement that you, as the creator, add to the price of your digital products. But, the process of calculating it correctly isn't always easy.

  Tax on digital products differs between states and nations.  

Although you are able to sell digital items quickly across borders but the complications start to creep in when it comes to handling the tax and billing. A few jurisdictions establish minimal revenue thresholds for paying taxes. That means that you could not be taxed if you make less money than the set threshold. In that regard there are a few things to consider:

  • Most US states have taxes on sales of digital products and services except Delaware, Montana, New Hampshire as well as Oregon for certain digital products and services.
  • In Georgia, New York, Pennsylvania in Georgia, New York, Pennsylvania Missouri the majority of digital goods and services are taxable. But, you're exempt selling eBooks or educational resources.
  • Kansas taxes for all digital services and goods other than magazines and newspapers.

What is the criteria for determining whether or not you're subject to taxes on digital goods?

Whether or not you need to collect taxes on digital sales is contingent upon many variables. This includes:

  • Your students' location: If they're located in the regions in which digital products are exempted from taxes You don't need to add taxes to the price of your products.
  • The type of digital product Content that is streamable or downloaded typically are taxed. Some states and countries offer tax exemptions for live lessons. Some jurisdictions offer different tax governance regarding online advertising and cloud computing. There are some that could penalize you if you classify your digital goods under the wrong category. So, you'll need be sure to check before filing tax returns because errors can cost you dearly.
  • Nexus: It is the tax-related relationship between the US state and an enterprise. It is possible to establish the nexus between two US state by having a physical presence there, having employees in that state, or by meeting additional requirements that are very different. After you've established a tax nexus it is necessary to include sales tax on your digital merchandise sales within that specific state. This will be discussed 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, you'll need to be careful about accurate invoicing concerning the products you sell.
  • The compliance aspect of digital products is very new to tax professionals in many states, which is why they are revising and reformulating their drafts. For your safety, you need to follow closely with the state's taxes on digital services as well as modifications made to them. Also, keep a log of any tax and sales transactions.

Of all the points mentioned above, you should know a little more about tax Nexus. The reason is that, the moment you establish a connection with a US state, then you'll have to include taxes on top of your course fee to ensure compliance.

What is an tax nexus?

Tax nexus refers to the relationship between a business and an American taxing state. If you're located within the US, you may develop the tax nexus of the US state. It allows you to charge sales tax to clients in the specific state. If you're not located outside the US, you may establish a nexus if you meet certain thresholds in revenue originating in the US state (i.e. the majority of your customers come from the same US state).

There are many options to create a tax nexus with a state:

  • The physical presence of a person: If reside in a specific US state, or you have employees or offices within that state and you are eligible for a nexus.
  • Affiliate nexus: You may qualify for an affiliate nexus if you are connected to an individual or business located in the state, and you have students sign-up using this relationship. That is that if you operate an affiliate system which directs your students towards your online class through affiliate connections that are based in a specific US state, then you could be eligible for the connection. States that have provisions for the nexus of affiliates include California, Connecticut, Maine, Missouri, etc.

How do you determine the exact location of your customers in order to add taxes properly

In the event that your students are spread across the globe, how can you accurately know how much sales tax to add to the bill?

Identifying digital product sales information can help you determine if you've established an tax linkage. It also helps you determine if your students need to pay sales taxes or are exempt from paying taxes, based upon the country, state or state they live in. A few methods of determining the sales location of customers are to track them:

  • Billing address: When you take onboard clients, record their country and zip/postal code when they check out. This will help you decide the need for a double tax.
  • IP address: Your customer' IP address is important data to determine their exact whereabouts. However, Virtual Private Networks (VPNs) and other technologies frequently hide it, which makes it less trustworthy over other approaches.
  • Credit card issuer address If the billing address and IP address don't match then you may be able to determine the source of your sales by relying on the address of the credit card issuer. Although this does not give precise information regarding your customer's place of residence, it's a reliable form of finding out the origin of revenue.
  • Delivery address: It's the standard method for determining the source of sales. But, it's more useful in the case of physical goods However, it's difficult to determine when you're selling digital products. Some people enter the wrong address or make payments that are successful due to a variety of reasons. So, we'd recommend taking this information with a an eye on the ball.

The most reliable methods for finding out the origin of sales are the billing and the credit card address for the card issuer. If both match, you can add a sales tax in line with.

Overwhelmed? Taxes on digital goods don't necessarily have to be difficult.

Navigating taxes on digital products isn't easy; we feel you! The complex rules and regulations between countries will put extra stress for businesses. It is a given reality that eventually you'll employ a tax professional or employ a software program to automate tax collection on your invoices for course registrations. To help you with this there are some ways to simplify this essential business activity:

  • Include tax in the price of your course after having a conversation to a tax advisor. Include a note in the instruction description that explains your pricing is tax inclusive. It could even be a great selling strategy since it provides transparency.
  • Leverage TCommerce. It allows you to check the location where customers pay their invoices. The Transaction Report will show the location of the transaction and also the zip code. This way, it can be determined whether you have to increase the price of your invoices by adding taxes.

Instead of fretting about the taxes you should add to invoices, you can use our tax-inclusive system. The most modern creator platforms offer built-in checkout tools for helping you increase invoices with tax-inclusive taxes. Additionally, you can integrate different tools like:

  • Quaderno: Quaderno helps you create custom fields that can be collected from your students at checkout (such as location) The ability to make use of Quaderno only when you use PayPal as well as Stripe. If you are a user with either of these services, you can avail a seven-day trial for free to test Quaderno and see whether it is a good fit for your needs.
  • InvoiceBus : InvoiceBus calculates the exact tax amount, but it only works with Stripe.

Wrap Up

As an educator of digital creation, there's a lot to be done. Beginning with planning the informational product to figuring out marketing, billing, and finances, plus, dealing with tax-related compliance can be difficult.

The reason taxes are so challenging is that rules are always changing around the world. After all, the definition of digital goods and the way they're taxed changes over time and across different countries. If you're planning to concentrate on the main aspects of your business(where your efforts and time are most important) is best to select a platform that can make compliance easier for you.

Our goal is to make this procedure as easy, simple as well as automated in order to assist creators with tax planning using our platform. Find out more about tax charging using our creator-friendly platform here.

  Disclaimer: Though we've made every effort to ensure that the information in this blog was correct at the time of publishing but does not accept the responsibility of tax decisions or actions resulting from information contained that is contained in this blog.