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Taxes On Digital Products: A Beginner's Guide

Apr 18, 2023

Are you growing as a creator-teacher? This is great news!

But have you already thought about taxes?

As an online business, the tax obligations of your business are based on many different aspects: the type of items you offer as well as the place you're based and where your clients are located, and this differs by jurisdiction across the US and Canada. Naturally, the tax system is complicated.

  Are you overwhelmed as an owner of a business? Find the key tax-saving tips listed below.

The world of taxation can be confusing at outset. Take the case of America. There is a Streamlined Sales and Use Tax Agreement (SSUTA) offers the details about taxation via digital means; if you observe, there's some variation between the US in the US itself.

For instance, Wisconsin's law it clarifies that tax laws don't apply to "Live digital online educational services." Thus, in Wisconsin, in circumstances where humans evaluate students and you deliver your live seminar or connect your students in real-time the students live, you do not have to contribute taxes. In contrast, if your online product is pre-recorded, automated online course, or if it contains downloadable documents, you might need to pay tax.

Let's get things clear: whether you'll have to add taxes to your pricing or not depends on where your customers live and what type of digital goods you offer, how you market or deliver them, and the extent to which you develop a partnership (aka"nexus") with a tax authority.

It is well-known that all this may take away from the main task at hand making unique content, and ensuring you spread the knowledge. We've put together this blog to help you get a better understanding of digital service tax with a focus on the US and Canada.

Skip ahead:

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

Digital sales tax (also known as e-commerce or digital transaction tax or digital tax) is a charge levied for internet-based sales of digital goods or services. It is used by governments to finance programs and public services. Digital service taxes, by the design, ensure fairness and a level-playing field for brick-and-mortar companies versus digital companies. After all, the former aren't the only ones who need to add taxes, while online sellers can find ways to get around tax rules.

In general terms, most governments worldwide levy digital service tax in proportion to the money their citizens earn through selling courses or subscriptions. It is a legal requirement that you, as the creator can add to the cost of your digital item. However, calculating it accurately can get confusing.

  Taxes on digital items varies across states and countries.  

Even though you can market digital products quickly across borders but the complications start to creep in when it comes to handling the tax and billing. Certain jurisdictions have the minimum threshold for revenue to be paid taxes. This means you can get tax exemption when you earn less than the set threshold. With that in mind, let us look at some of the following facts to consider:

  • Nearly all US states levy a sales tax on digital services and goods, except for Delaware, Montana, New Hampshire as well as Oregon for certain digital items as well as services.
  • The states of Georgia, New York, Pennsylvania, and Missouri, most digital products and services are taxable. But, you're exempt selling eBooks or educational material.
  • Kansas taxes all digital goods and services with the exception of magazines and newspapers.

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

If you are required to pay taxes on your digital products sales will depend on several aspects. They include:

  • The location of your students In the regions in which digital products are exempted from taxes and you're not required to include taxes in your pricing.
  • The type of digital product streaming and downloadable content generally are taxed. Some states and countries offer tax-free live classes. Other jurisdictions have different taxes on online ads and cloud computing. Certain jurisdictions may be penalized if you categorize your digital goods under the wrong category. Therefore, it is important ensure that you double-check the tax return, since mistakes could be expensive.
  • Nexus: The nexus is the tax-related relationship between a US state and an enterprise. It is possible to establish the nexus between two US state through maintaining an office in the state and having employees working in the state, or meeting other criteria which greatly vary. Once you establish a tax nexus, you need to add sales tax on your digital product sales in that particular state. This will be discussed in greater depth below.
  • Product bundles: If you sell courses and other products in bundles and only a handful of items in the bundle are taxable, you'll need to be careful about accurate invoicing concerning the product.
  • The compliance aspect of digital products is very new to tax professionals in many states, which is why they are rewriting and revising their drafts. To ensure your security it is essential to keep the regulations on taxation of digital services and changes made to them and keep a log of any tax and sales payments.

In addition to the information mentioned above, you should be aware of tax the nexus. The reason is that, the moment you establish a connection with a US state, you'll have to include taxes on top of your cost of the course to ensure that you're in compliance.

What is a tax nexus?

A tax nexus can be described as an arrangement between a company and an American taxing state. If you're located within the US or Canada, you could establish a tax nexus with an US state. This allows you to apply taxes on sales to customers from the state you are in. Alternatively, if you are situated outside of the US You can create a nexus once you meet certain thresholds in revenue that originate from the US states (i.e. that the majority of your customers come from a particular US State).

Here are a variety options to create an tax nexus to a state:

  • Physical presence nexus: If you reside in a specific US state or have employees or offices in the state of that particular one and you are eligible for an relationship.
  • Affiliate nexus: It is possible to be eligible for affiliate nexus when you're affiliated with an individual or business located in the state in which your students are enrolled through this. In other words If you've got an affiliate system which directs your students towards your online courses through affiliate partnerships with a particular US state, you may be eligible for a relationship. States that have provisions for the nexus of affiliates include California, Connecticut, Maine, Missouri, etc.

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

If your students spread around the globe, how can you be able to accurately determine the amount of sales tax you should add on your invoice?

The information on sales of digital products helps you figure out if you have established the tax connection. This also lets you understand the requirements of your students to pay sales tax or are exempt, depending on which country or state they reside in. Some ways to detect the locations of purchases made by customers are to track them:

  • Address for billing: If you are onboard with customers, keep track of their country and postal zip code when they check out. This helps determine whether or not you have to pay an additional tax.
  • IP address: The customer's IP address can be valuable data to determine their exact location. But, Virtual Private Networks (VPNs) as well as other technology often mask it, making it less trustworthy over other approaches.
  • Credit card issuer's address If the billing address and IP are not in sync it is possible to source your sales using the address of your credit card issuer. While this doesn't provide accurate information about the customer's location, it's considered to be a valid method for finding out the origin of sales.
  • Delivery address: It's the gold standard for finding out the origin of sales. It's a lot more sensible in the case of physical goods, but it can be uncertain when dealing with digital products. Some people enter the wrong address, and then make a successful payment because of a number of factors. Hence, we'd say take this bit of information with a grain of salt.

The most reliable methods for determining the source of sales is to check the address of the biller and the credit card address for the card issuer. If both are in agreement it is possible to add sales tax on your price according to.

Overwhelmed? Tax on digital products doesn't need to be difficult.

Navigating taxes on digital products isn't easy; we feel you! The complex rules and regulations across borders will put extra stress on your business. You can't get around the possibility that you'll eventually hire a tax consultant or employ a software program that automates tax collection for your course subscriptions and invoices. In that vein Here are a few things you can do in order to streamline this crucial business activity:

  • Incorporate taxes into the price of your course after having a conversation to a tax advisor. In your instruction description that explains the price is tax-inclusive. This could serve as a powerful selling tool because it increases transparency.
  • Leverage TCommerce. It lets you know the location where customers pay their invoices. The Transaction Report will show the country as well as the zip code, so you can determine if you are obligated to include taxes in your price.

Instead of fretting about the taxes to include on your invoices, use our tax-inclusive platform. The most modern creator platforms include built-in checkout features that allows you to raise invoices with tax-inclusive taxes. It is also possible to integrate different tools like:

  • Quaderno: Quaderno helps you design custom fields to collect data from students during the checkout process (such as the location) You can use Quaderno only if you are using PayPal or Stripe. If you are a user who uses either, you will get a seven-day free trial to try out Quaderno and see whether it is a good fit for your needs.
  • InvoiceBus : InvoiceBus calculates the exact tax amount, but it does not support Stripe.

Wrap up

Being an educator in the digital realm, there's much to do. Beginning with planning the informational product to working out marketing billing, and finances, and over that, managing tax compliance can become difficult.

What makes taxes even more difficult is the fact that tax rules are frequently changing throughout the globe. In the end, the meaning of digital services and how they're taxed is constantly evolving over time and across different countries. If you're planning to concentrate on the main aspects of your business(where your efforts and time matter most) is best to pick a system that simplifies such compliance-related aspects for you.

We strive to make the process as smooth, intuitive and as efficient as we can for creators to navigate tax issues right from our interface. Discover more information about imposing taxes through our user-friendly platform for creators here.

  Disclaimer: Although we have put in every effort to make sure that the information in this blog was correct as of the date it was published however, it does not take responsibility for readers' fiscal decisions or actions that arise from the information that is contained in this blog.