“Digital good” seems like an oxymoron. Digital is obviously of the new world; it’s modern. “Good” makes you think of old-fashioned trade.
Goods have always been something physical, something tangible. They’ve been fabric and furniture sailed in on a ship, imported from a faraway country. They’ve been books, pottery, or appliances rolled across borders, packed in trucks. The whole manufacturing line comes to mind, from raw materials to retail sales.
But how does our idea of a good change when placed in the virtual world created by computers?
The digital market is full of virtual products that you can’t feel, carry, or package in a box. These are the digital goods. You’ve probably also heard them referred to as:
- Digital products
- Digital service
- Electronic good or electronic service
- E-good or e-service
They’re essentially all the same thing. For the sake of this article, we’re going to stick with the term “digital product” — and explore how the definition of a product changes in the digital setting.
Definition of a digital product
Why does it matter? Because the definitions of “digital products” determine what taxes you have to pay. If you’re unaware of which countries consider your product a digital product, you risk breaking the law.
Oh yeah, that’s right: definitions. Plural.
The definition of a “digital product” is elastic. Any place you go in the world, and within the 50 states of the US, will have its own version of the definition, making small additions or omissions in what’s considered a digital good. For example, some jurisdictions consider online newspaper subscriptions to be electronic goods, and other places don’t.
But the basic fact remains the same: whatever you are paying for, you receive it via the internet. It arrives in an email, or you download it from a website, or you access it by logging into an online portal. This product originates from and lives in the digital space.
But don’t just take our word for it. Here are some definitions pulled directly from different tax authorities:
In the EU
“Services which are delivered over the Internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention, and impossible to ensure in the absence of information technology.” – The European Commission Taxation and Customs Union in their policy on telecommunications, broadcasting, and electronic services.
“Intangible supplies such as supplies of digital content, games and software.” – The Australian Parliament, but this definition may exclude digital supplies of education or health services.
In many states in the US
“Any product that is transferred electronically to the customer.” – Streamlined Sales and Use Tax Agreement (SSUTA). The Streamlined Sales Tax Governing Board is an association of 23 states who all align on the same regulations, in an effort to simplify and standardize how sales tax is handled across multiple states. But even this standardization is complicated!
Examples of digital products on the market today
Sometimes the easiest way to understand a concept is to just look at actual real world examples. So let’s do that with digital goods. Chances are that you pay for many digital products already. And in fact, just by reading this article right now, you’re using at least one!
Here’s a list of common digital products. BUT -- since the definitions can be quite detailed and various, please do not assume that everything on this list is considered a “digital good” everywhere.
- E-books, images, movies, and videos, whether buying a copy off of Amazon or using a service like Netflix. In tax language, these products are in a category usually called, “Audio, visual, or audio-visual products.”
- Downloadable and streaming music, whether buying an MP3 or using a service like SoundCloud or Spotify. Of course, these products also fall in the audio category.
- Cloud-based software and as-a-Service products, such as Software-as-a-Service (SaaS), Platform-as-a-Service (PaaS), and Infrastructure-as-a-Service (IaaS).
- Websites, site hosting services, and internet service providers.
Taxing digital goods
If the definitions are any indication, the bureaucratic side of the digital market can be confusing! This is definitely the case when it comes to digital taxes. There are complex, shifting, inconsistent laws about how and when to tax electronic products. The tax isn’t even called the same thing in every country.
What’s the proper name of the tax?
Different countries have different tax systems, which they apply to digital products.
- Sales tax in the United States
- Value-Added Tax (VAT) in the EU, South Africa, the Philippines and others
- Goods and Services Tax (GST) in Australia, New Zealand, India, and others
When should you charge tax on digital goods?
As tax compliance experts, we get this question A LOT, and from our experience, answering this could take all day. Or all week. Just like there is no single definition of a digital product, there is no standard model for when (or how much) tax needs to be added to the sale. This is confusing and overwhelming, but we'll explain how to track digital taxes automatically later on.
In some places, like the EU, it depends on where your customer is located. In other places, like some states in the US, it depends on where your business operates. Sometimes it’s a combination of those two factors. And even once you’ve figured it out for the regions where you do business, there’s a good chance the tax regulations will change and then you’re back to square one.
We’ve only given you a brief overview here, but if you’re curious to learn in more detail, please have a look at our guide which breaks down digital taxes all over the world, “Digital Taxes Around The World.”
Is this stressing you out?
If you’re a little frazzled after just reading this article, don’t worry! Digital goods might give you a tax headache, but digital goods can also relieve it. That’s a beautiful thing about technology. 🙂
There are accounting solutions out there to help your business comply with sales tax around the world, in an instant. You actually don’t even need to think about it on the day-to-day.
Quaderno will automate all of your sales tax compliance, all of the tedious tasks and tricky numbers. From automatically sending tax receipts anywhere in the world (and in multiple languages and currencies!) to producing full, easy-to-read tax reports for filing season (just takes a click of a button) — your business will run smoothly and error-free. Can you imagine?
Well, you don’t have to. Just sign up for our 7-day free trial and see how simple it can be.
Note: At Quaderno we love providing helpful information and best practices about taxes, but we are not certified tax advisors. For further help, or if you are ever in doubt, please consult a professional tax advisor or the Tax Agency.