Everything You Should Be Aware of Digital Taxes as well as VAT

Are you struggling to stay on top of digital tax rules in the world market? There's no need to worry. Within 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. If you travel outside the U.S. and you have additional complicated rules regarding taxation for digital goods. For example, countries under the European Union will apply varying amounts of the Value added Tax (VAT) on all exported digital products as well as services to ensure fairness to EU sellers.

It's a lot of information to process. It's a lot to take in. SaaS sellers must do the basics right, or risk being penalized in both their country of origin and those they conduct business in abroad. Failure to register for VAT, or to use it in a proper manner, could lead to hundreds of dollars in penalties and could lead to your digital product being banned from being sold in specific countries.

Here's a look at how to comply with tax laws and protect the image of your SaaS business when selling digital items on the internet.

What is digital goods or product?

For the purpose of this blog this blog post, we'll describe digital goods as non-tangible physical or non-physical products that exist in electronic format. Some examples include:

• The downloaded software (photo editors, DJ software, etc.)
• Digital assets (ebooks or image files audio files/audio clips, films or digital video)
• Web applications/Software as a Service (SaaS)

One of the great things regarding digital goods is that because of their digital nature, they can easily reproduced and sold without the need for businesses to manage complicated manufacturing processes. Additionally, because most of these digital goods exist in digital form, buyers can access the software or product they purchased quickly, without having to wait for the item to be transported and then delivered.

Understanding the Taxation System in the United States

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

In recognition of the growing popularity 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 modifying their existing tax statutes or by simply broadening their definitions of "tangible personal property" to encompass digital goods.

A number of states have also enacted specific laws that define digital downloads various ways but they are always taxed such as Colorado, Connecticut, Idaho, Kentucky, Nebraska, New Jersey, South Dakota, Tennessee, Vermont, Washington, and Wisconsin.

However, what businesses selling digital products must be aware of is the fact that laws governing the sale of digital goods will change. Just take a look at the recent Wayfair state tax Ruling. The Supreme Court declared that online sellers can be ordered to collect sales tax in the states that they conduct business even though they do not have a physical brick-and-mortar store. In addition, given that tax rates will vary between 1% and 7%, keeping track of the "digital product market" could be a challenge.

But if you think that you're able to avoid taxes associated with the selling of digital products, think again. The U.S. federal government is taking a keen look at digital taxation and could consider the sale of digital goods as a taxable event in the near future. In 2011 The Internal Revenue Service (IRS) created the position of Director of Transfer Pricing to investigate nationwide prices and taxation of SaaS products.

Taxation within the European Union

The E.U. established the VAT, which is applied on all goods and services, in order to convince its citizens to buy from E.U. businesses. Digital products can be broadly described as VAT-related, which means when you offer your products to E.U. citizens, this probably applies to the products you sell to them.

The VAT rates differ between E.U. countries ranging from 15 to percentage - something that you need to be aware of when setting the price for your SaaS service for E.U. buyers. If you fail to take into account taxes, your digital product is going to appear expensive next to E.U. competitors.

As with selling to states in the U.S., selling to diverse countries of the E.U is difficult due to tax rates that vary and the way they're applied. In the past there were a few SaaS companies tried to sidestep the tax burden through the establishment of small subsidiary companies with E.U. countries. Don't try this now; the VAT rate has been changed so that it applies to all sellers regardless of location.

Doing it Right

Naturally, it's hard to be sure the digital business is fully in compliance with both international and local tax laws. That's why experts recommend partnering with a digital commerce platform - - a firm which specializes in international financial transactions.

E-commerce platforms like this stay at the cutting edge of tax laws as well as international laws. It allows you to concentrate on the development and marketing of your products, while handling transaction-level information like taxes.

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