Taxation Rules for Digital Goods

The development of the Internet has yielded some new financial terms and innovations. Now that people trade goods both offline and online, the tax authorities are looking to get their share from both worlds. Since some people who buy or sell things online might not be aware of that fact, it’s important to learn more about the taxation rules for digital goods. That’s why we’ve prepared a short guide on the most important terms that every e-trader should know.

The broad term of digital goods

Digital goods can be defined in many different ways, and this definition may vary from country to country. The explanation provided by Business Dictionary defines digital goods as “anything that can be delivered through an information infrastructure such as the Internet”. While this is absolutely correct, it’s a bit too broad term regarding taxation. You’ll need to pay taxes only on the digital goods that are sold or bought on the Web, unlike the data that you share for free with your friends, family or employees.

Therefore, the definition provided by the US Streamlined Tax Governing Board will be more valuable for contemporary business owners. According to that authority, taxable digital goods are:

Electronic books – books that are distributed and sold electronically and used on electronic devices. For instance, if you’re selling e-books on Amazon, you’ll be eligible to pay taxes.

Digital audio format – any type of sounds, tones, music and voice and their combinations sold on the Internet are taxable.

Electronic audio-visual content – music videos, movies, cartoons, video games and any other combination of visuals and music sold on the Web can be subjected to taxation.

In a nutshell, everything you purchase and use on the Internet, in digital form, is considered a taxable digital good and you should make sure that you obey the law on that matter.

The tax eligibility of online businesses

Now that we know that the tax authorities are extremely interested in digital goods, let’s find out more about some exceptions.

Let’s say that you live in the US and you want to buy a video game from an American vendor. In that case, the vendor will have to pay the tax on the sold item, i.e. the tax will be included in the price.

However, if you want to buy a digital good from a foreign vendor, you won’t be subjected to the US tax regulations. The vendor will have to regulate the tax obligations related to the sold item with their local tax authorities.

When you’re a vendor, there are several different combinations and belonging tax rules:

Entrepreneurs with a tax nexus in the US who live abroad

If you don’t live in the US, but some part of your business is located in one of the US states (we’ll talk more about the sales tax nexus later), you’ll be eligible to pay sales taxes in that state. In that case, you’ll have to request a sales tax permit in that state, so as to get the official document that you’re both obliged and allowed to collect and pay taxes.

What’s good to know if you’re planning to launch a business that will sell digital goods in the US is that five federal states don’t impose a sales tax on their entrepreneurs. These states are New Hampshire, Delaware, Montana, Oregon, and Alaska. Still, they might have some other requirements, so make sure to check their terms before you go and register a business there.

Businesspeople without a tax nexus in the US who live abroad

Business entities and their owners who don’t have a tax nexus in the US and don’t live there won’t have to collect or pay taxes in any of the states.

In that case, you can freely sell digital goods to US citizens, without worrying about their tax obligations.

Nevertheless, that doesn’t mean that you’re completely tax-free. You’ll need to go to your local tax office and inquire about their rules on exporting digital goods. Some countries that are trying to support the local economy don’t impose taxes on such goods, so check the status of that business niche before you make your first sale.

Business owners who work in the US, but aren’t US citizens

Even though you might not have that renowned marine blue passport, you’ll still have to register with the local state tax office, in case you have a business in that region.

In line with that, you’ll have to pay all the taxes payable by US citizens. Again, go to the local tax administration and learn more about the general rules about taxing digital goods in the US.

What is a tax sales nexus?

Having a tax sales nexus means that you need to pay taxes on the sales made by your business.

In the US, for instance, a tax sales nexus can depend on many things. That way, if you only have a warehouse or employees in a state, your business is subjected to the sales taxes of that state. Similarly, if you have business partners and affiliates in a particular state, you’ll be subjected to the local taxes.

Even if your employees are just traveling through a state, say to attend a trade show, the local tax authorities in some parts of the USA might tax you for the goods you sell there.

Naturally, the most obvious sales nexus is having a direct store or office in a certain state.

When you realize that you need to file a tax return, think about contacting a tax preparer and sorting out all the nuts and bolts of the local taxes on digital products.

Taxing digital goods in the EU and Australia

When you’re making digital sales in the EU, you need to charge the buyer with their local taxes. For example, a French vendor selling a video game to a Spanish buyer will need to take into consideration the buyer’s tax rate for that very product.

Even though this is a common market, VAT rules may vary from country to country, which then leads to differences in taxation terms. That’s why the safest thing to do is read the EU tax guide on the digital economy, just to make sure not to miss any of the tax rules.

As for Australia, each purchase that includes digital goods Down Under is subjected to the 10% tax called GST. In line with that, every product purchased from overseas by an Australian customer will have that tax included in its price.

Conclusion

Business owners need to know that they aren’t the only business subjects that are connecting on the Internet. The tax authorities throughout the world are closely following the latest trends, and they’re trying to get their share of profits. Because of that, digital vendors and customers should find out more about taxation rules in different parts of the world. This guide will help you cover all the taxation bases of your digital sales.

Mark Thomasson
Mark is a biz-dev hero at Invoicebus - a simple invoicing service that gets your invoices paid faster. He passionately blogs on topics that help small biz owners succeed in their business. He is also a lifelong learner who practices mindfulness and enjoys long walks in nature more than anything else.
Mark Thomasson

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