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Tax On Digital Products: A Beginner's Guide

Apr 18, 2023

Are you growing as a creator-teacher? It's a great thing!

You haven't thought about your taxes yet?

As an online business, the tax liability of an online business is contingent on many different factors: the types of products you sell as well as the place you're based, where your customers are located and the tax implications vary depending on the state in which you operate within the US as well as Canada. It's not surprising that it's complex.

  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) gives details on digital taxation. if you observe, there's quite a bit of variation between the US in the US itself.

The law in Wisconsin, for example states that taxes do not pertain to "Live digital online educational services." In Wisconsin the situation where an actual human evaluates students and you deliver your course as a seminar in real-time and you interact with your students via live video, you don't have to contribute taxes. In contrast, if your online course is recorded and automated online course, or if it contains 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 provide them, as well as if you establish a relationship (aka the nexus) with a tax-related jurisdiction.

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

Skip ahead:

What is the digital service tax and who is required to contribute to it?

Digital sales tax (also called e-commerce, digital transaction tax, also known as digital tax) is a tax imposed for sale of digital items or services. Governments use it to fund public services and programs. 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 who need to collect taxes. On the other hand, digital sellers find ways to get around tax rules.

Speaking in general terms generally, the vast majority of countries worldwide levie 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 product. But, the process of calculating it correctly isn't always easy.

  Taxes on digital items is different across countries and states.  

Although you are able to sell digital items quickly across borders, the complexities creep in when it comes to handling the tax and billing. Certain jurisdictions have the minimum threshold for revenue to be paid taxes. In other words, you may not be taxed if you make less money than the threshold. In that regard there are a few things to take note of:

  • Most US states charge taxes on sales of digital goods and services except Delaware, Montana, New Hampshire, and Oregon, on certain digital items as well as services.
  • For Georgia, New York, Pennsylvania, and Missouri the majority of digital goods and services are taxable. You are not taxed when you offer eBooks and educational resources.
  • Kansas taxes all digital goods and services with the exception of magazines and newspapers.

What determines whether you're liable to charge tax for digital products?

The need to collect taxes on digital products sales will depend on many variables. These include:

  • The place where your students are In areas where digital goods are exempted from taxes and you're not required to include taxes in your prices.
  • Type of digital products streaming and downloadable content generally are taxed. A few states and countries provide tax exempts on live instruction. Other jurisdictions have different taxes on online ads and cloud computing. There are some that could be penalized if you categorize your digital products under the wrong classification. Therefore, it is important ensure that you double-check your returns, as errors can cost you dearly.
  • Nexus: It is the tax-related relation between a US state and a business. There is a way to create an nexus with a US state by having an office in the state and having employees working in the state, or if you meet other requirements that are very different. After you've established the tax nexus then you must add sales tax to your online product sales in that particular state. We'll cover this in more depth below.
  • Bundles of products: If you offer courses or other items in bundles, and only a handful of items included in that bundle are tax deductible, then you'll need to be careful about accurate invoicing concerning your product.
  • Conformity: Digital services are relatively new to tax officials as well as many states are revising and reformulating their drafts. To ensure your security it is essential to keep closely with the state's regulations on taxation of digital services and changes made to them and keep track of any tax and sales payment.

Of all the points that were mentioned, it is important to learn more about tax nexus. This is because the moment you establish a connection with the 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 an tax nexus?

A tax nexus can be described as a relationship between a business and an American taxing state. If you're located in the US and you have a tax nexus, it is possible to establish a tax nexus with a US state. This allows you to apply sales taxes to customers in the state you are in. If you're not located outside the US, you may be able to establish a nexus when you meet certain thresholds in revenue that originate from a US State (i.e. the majority of your customers come from a particular US state).

There are many of ways to establish a tax nexus with the state of

  • The physical presence of a person: If reside in a certain US state, or you have an employee or office within that state, you may qualify to be the connection.
  • Affiliate nexus: You may get an affiliate nexus when you're associated with a person or business in the state, and you have students are enrolled through this. That is, if you have an affiliate system which directs your students to your online class through affiliate connections with a particular US state, you might be eligible for the relationship. The states that are subject to the nexus of affiliates include California, Connecticut, Maine, Missouri, etc.

How do you determine the location of your clients so that you add taxes accurately

Now if your students spread around the world, how do you be able to accurately determine the amount of sales tax to add on your invoice?

The information on sales of digital products helps you figure out if you've established a tax connection. Also, it helps to determine if your students need to pay sales tax or are exempt depending on the state or country they reside in. Some ways to detect the sales location of clients include:

  • Address for billing: If you are onboard with customers, keep track of their country and postal zip code during checkout. This helps determine the need for the double tax.
  • IP address: Your customer' IP address is important data to determine their exact location. However, Virtual Private Networks (VPNs) and other technologies typically hide this information, making it less trustworthy as other techniques.
  • Address of the credit card issuer If the customer's billing address and IP address do not match it is possible to source your sales using the address of your credit card issuer. Although this does not give precise information regarding your customer's place of residence, it's an accurate method of determining the source of sales.
  • Delivery address: This is the most reliable method of determining the source of sales. However, it's more practical when you sell physical products, but it can be sketchy when it comes to digital items. Sometimes, people type in an incorrect address and make successful payments due to a variety of reasons. Therefore, we'd suggest taking this piece of advice with a grain of salt.

The most precise method of determining the source of sales is to check the address of the biller as well as the credit card address of the issuer. If both are in agreement, you can add a sales tax accordingly.

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

Navigating taxes on digital products can feel challenging It's a real struggle! The complex laws and regulations in different countries could put additional stress for businesses. It is a given reality that eventually you'll employ a tax professional or utilize a tool to streamline tax collection on your course subscriptions and invoices. So there are some tips to make it easier for you to manage this vital enterprise task:

  • Incorporate taxes into your course pricing after speaking to a tax advisor. In your course description which clarifies that your pricing is tax inclusive. It could even be a great selling strategy since it provides the appearance of transparency.
  • Leverage TCommerce. It lets you know where your customers are paying the invoices. The Transaction Report displays the country as well as the zip code so that you know whether you have to increase the price of your invoices by adding taxes.

Instead of fretting about the taxes you should add to invoices, make use of our tax-inclusive system. The most modern creator platforms have built-in checkout for helping you increase invoices with taxes. It is also possible to integrate other tools, such as:

  • Quaderno: Quaderno helps you design custom fields to collect data from students during checkout (such as the location) The ability to use Quaderno only when you use PayPal and Stripe. If you're already a member of with either of these services, you can avail a seven-day free trial to try out Quaderno and determine if it works for you.
  • InvoiceBus : InvoiceBus calculates the correct tax amount but only supports Stripe.

Wrap up

Being an educator in the digital realm, there's much to do. Starting with the planning of your infographic to figuring out marketing, finance, and billing and over that, managing compliances like taxes can get overwhelming.

Taxes are a lot more difficult is the fact that tax rules are always changing around 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 your core business(where your time and energy are most important) It is recommended to select a platform which can simplify compliance issues for you.

We strive to make this procedure as easy, simple, and automated as possible for creators to navigate tax issues directly from our user interface. Learn more about charging taxes using our creator-friendly platform here.

  Disclaimer: Although we have taken every precaution to ensure that the information on this blog is correct at the time of publishing but does not accept responsibility for readers' tax decisions or actions resulting of the information provided in this blog.