Merchants On High Alert About Taxes On Digital Products (Pt. 1)
Mar 6, 2019
The recent “Netflix Tax” has reignited the discussion about tax on digital products and services. While this may seem reserved to big tech companies, it’s a widespread issue for many internet marketers and merchants. When and where should you apply sales tax on digital services and products? How much and what type of implementation happens on a checkout page? What impact do charging taxes have on high-risk merchants? It’s getting harder to overlook these issues and continue operating like business as usual.
As high-risk merchant services and payment solutions experts, we’ve helped many of our clients navigate this issue. Taxes become a challenge when you’re selling info products. Avoiding tax obligations will definitely put you at risk and may lead to the loss of your business.
The main thing to understand is digital tax imposition varies based on countries – and within states – like the US, as well as product type. In this two-part blog series, DirectPayNet will offer a brief guide on the impact of taxes on info products. It’s important to conduct additional research about this based on the countries and specific states/provinces in which your customers live. Obtain specialized help from your accountant and payment provider to keep your business compliant, and your merchant account operational.
Two things are inevitable – taxes and …
For the past few months, the so-called “Netflix Tax” has dominated the news in addition to record profits earned by big companies like Amazon and Facebook. There’s been a massive shift to consumer digital products and services online. Consequently, more governments in US states and European countries are proposing more taxes on streaming and other digital products like online dating apps.
The EU is debating the terms of the imposition of a new digital tax primarily aimed at large tech companies. While the EU continues to deliberate, France went ahead and implemented their new digital tax law. The latter became effective January 1, 2019. In the UK, their digital services tax – which is expected to target more profitable tech companies – is to be fully implemented by 2020.
Now, similar measures that will have an impact on smaller sellers of digital products in several US states. Questions about the long-term implications of the “Netflix Tax” have been raised in Georgia. Meanwhile in Chicago, litigation ensues over proposed tax changes on “digital goods and services” that will affect big and small entrepreneurs.
Taxes on digital products affects big and smaller businesses
Keep in mind; no matter the size of your business, it will be subject to paying state (or provincial) and federal taxes. The roll out of taxation for digital goods is still uncertain, so it is important to continuously keep abreast of news. Not knowing the rules and regulations doesn’t absolve you from following them!
Most of these newer laws are designed to target corporate digital giants like Netflix, Amazon and Facebook. However, some regulations will impact small-to-medium-sized merchants too. So, what if you’re an affiliate marketer but have decided to now sell a business opportunity or another info product (say through affiliate networks like ClickBank)? You earn modest revenue compared to these tech giants. Will you be affected and respond to these changes? How will you navigate selling to customers across states/provinces and internationally?
As an online merchant, be aware of how these changes will affect the digital courses and e-books you sell. And as we’ve seen with digital subscription services like Netflix, streaming models aren’t exempt. Plus, online coaches and trainers must also become aware of these new and current tax regulations. It doesn’t matter if they are stated as Value Added Tax (VAT), Goods and Services Tax (GST), or just sales tax. These fees may soon be inevitable, as most merchants will be subject to them.
It’s also possible that your jurisdiction already imposed a digital goods tax, but you haven’t been collecting them. What to do now?
Digital products are already taxed… Just not everywhere
Sales tax is currently charged on digital products and/or services in at least 20 US states. In the US, states like Washington, Florida, Pennsylvania, and North Carolina, have already levied a digital services tax on items such as streaming and digital goods tax on ebooks and courses. So, if you and your customer are located in Pennsylvania, you must include the sales tax. It’s also important to review exact tax legislation to see what is the scope of taxation and which customers should be taxed.
This is among the growing trend across the world, and especially in North America and Europe, where taxes are being levied on digital products. In January 2018, Uruguay implemented a sales tax on digital products. Argentina followed suit in June 2018. Digital sales tax came in effect in January 2019 in Quebec, Canada.
Digital products/services are not uniformly defined
The definition of digital products and services can vary across states in the US. Then, those definitions vary again in different countries. As such, local regulations on taxes will differ by country and by state as in the case of the US. For the most part, the EU has a more uniformed definition of what consists of a digital product or service. The exact definition determines what is taxable or not. Info products like e-books and online courses are great examples of how it can differ. For example, digital goods may be taxed differently based on whether they can be downloaded versus being accessed solely online through a member’s area.
Sales tax for online courses
In showing the diverse nature of taxes for digital products we can take a look at online courses and business opportunities. The online course market is booming. According to Statista, the worldwide e-learning market is expected to surpass USD $243 billion by 2022.
Each US state has its own rules on taxes for online courses. Consequently applicable taxes for e-learning sold will differ and depend on whether you or your clients are in Wisconsin versus New York, Texas, or Florida. There are different rules based on course type: downloadable, pre-recorded, or delivered as live webinars. The difference in regulations also covers whether students interact with each other or the course is fully automated. Generally, automated online courses are subject to digital sales taxes in these states while those with human interactions are not.
So, what do these current and future changes in regulation mean for your online business? Digital taxation isn’t new. There are merchant service providers, legal experts and taxation professionals available to help you navigate these complexities. Adjust your payment system to facilitate your customers‘ ability to pay taxes on your products.
For example, if House Bill 426 (which proposes a digital products tax) is passed in Maryland, that’s another state you’ll need to cover in your tax processes. While operating in multiple jurisdictions like Netflix does across the world – even on a much smaller scale – you must become aware of the tax requirements for your business.
Call on DirectPayNet for help
The implications of taxing digital products is quite important for high-risk merchants. It makes a big difference having an advocate to support and provide guidance on compliance for regulatory measures. In the second part of our blog post we will touch on more information about this, but in the meantime contact us. Contact our team for expert advice on how to navigate these types of regulations for your industry.