The digital age has posed major questions and considerations regarding the taxes corporations and small businesses alike should be liable for from their digital activities.
There has been much publicity surrounding major companies solely, or at least primarily involved, in purely digital activities as opposed to selling physical products such as Facebook and Google and their alleged tax avoidance methods.
There are important factors to be aware of if engaged in digital activities whether selling digital products or services.
The complications of digital
Generally speaking, selling physical products is more straightforward: sales can be tracked easily and records created through modern POS (Point of Sale) tech use.
From here, tax liabilities can be calculated based on profits and where products are sold whether just in the U.S. or elsewhere in the world.
Digital services and products are more complicated; VAT (Value Added Tax) rules can be a challenge if selling into other markets outside the U.S. such as in the EU (European Union). Get it wrong and heavy fines can result along with a ban on your product being sold in certain other countries.
Defining a digital product
In a nutshell, they’re non-physical goods existing in an electronic format when sold such as:
- Software – includes downloadable productivity suites and photo editing software
- Digital ‘assets’ – including eBooks, images, videos, audio files – or could be a combination of one or more such as an online course comprising of an eBook and video
Unlike physical products that have to be processed and shipped to their destination, a digital product can be downloaded instantly by anyone pretty much anywhere in the world.
A variety of tax laws
In the U.S. there are various laws relating to the taxation of digital downloads depending on the state: some have instituted specific digital legislation including Connecticut, Idaho and Kentucky while some – including Montana, Oregon and Alaska – don’t currently have digital download tax laws.
Other states have simply covered digital downloads by expanding the definition of physical products – ‘tangible personal property’ – to also include digital; states including Texas, Indiana and Arizona fall into this category.
It’s an area subject to change; a key game changer was the Wayfair Ruling that decreed businesses conducting digital sales have to collect sales taxes for each state they do business in irrespective of whether they have a physical presence there.
Add to this the fact sales taxes can vary throughout the U.S. and it’s important to ‘do the right thing’ – especially if you’re new to the market and digital products and services are your first foray as opposed to an additional strand to your business.
Selling digital products abroad
In Europe, the EU applies VAT to imported goods and services including digital products.
The rates of VAT vary across the different EU member countries, however, so pricing is key as your product could look expensive compared to the competition. One method previously used to deal with selling to these countries with varying VAT rates – setting up an EU subsidiary – won’t work now: VAT rules have been amended so they apply regardless of location.
Attempting a unified tax position
A key reason why larger corporations such as Apple, Google and Amazon have paid less tax then some say is fair and reasonable is due to their taking advantage of tax rules in different countries; the Organization for Economic Co-operation and Development (OECD) is attempting to standardize tax rules across the world’s 34 wealthiest nations.
Ensuring larger global corporations pay more realistic taxes – it’s said their tax avoidance is worth around $240 billion in lost tax revenues each year – would involve setting a universal benchmark for taxing digital products and services, so it’s one to keep monitoring.