Shopify Tax Guide For Digital Products
Selling on Shopify but need help navigating the maze of digital taxes? Unsure if you’re following the right protocols and staying compliant in every country? Well then it’s great you found this guide, which aims to answer all of your questions about tax on digital products.
From VAT to GST, tax receipts to tax returns, this guide will ensure your Shopify store is on the ball. We’ve even included some tips and tricks that will keep you sane and your customers happy! Let’s get started.
What is a digital product?
First and foremost: a digital product is any good or service that’s delivered over the internet. If you’re using a digital download app to sell on Shopify, then your products qualify.
The definition of “digital product” is flexible. Different countries have their own versions of the definition.
But the basic fact remains the same: whatever you are selling, you deliver the product via the internet. It arrives in an email or the customer access it by logging into an online portal. In the case of Shopify, the customer downloads it directly from your store.
To get more formal (but not necessarily more specific!), 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 (PDF) 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
Here’s a list of common digital products. BUT! Since the definitions can be quite detailed and various, please don’t assume that everything on this list is considered a “digital product” everywhere.
- E-books, images, movies, and videos, whether buying a copy from Shopify 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.
- Online ads and affiliate marketing. Income from these services can be considered taxable under digital tax policies.
As stated up top, if you are using a digital downloads app (either provided by Shopify or a third party) to make your sales on Shopify, then rest assured you fall into the digital products category!
Taxes for digital products (a.k.a. digital taxes)
First and foremost: Many countries have specific tax policies for digital products. From country to country, these digital taxes have different names, rates, and thresholds.
What are consumption taxes?
Consumption taxes apply to the purchase goods and services. There are different kinds of consumption taxes, depending on the country. Each type requires something different from you, the business owner.
But one element always stays the same. The end customer pays the tax, because they are who’s actually consuming the end product. For digital products, the consumption tax is usually a set percentage of the total transaction, and you simply add it to the sale total.
Here are the three most common consumption taxes you’ll see while selling on Shopify:
1. Value-added Tax
Value-added tax (VAT) is one where the consumption tax is charged at each stage of production. At each stage, there’s an increase in value of the good or service. That increase, the “value added,” is what’s being taxed. But the cool thing is that, as a business owner, you get back whatever VAT you’ve paid in the chain. Only the end consumer pays out of pocket.
Typically VAT works like so: you pay some amount of VAT to other businesses who help you make your product. These slivers of VAT are called “input taxes,” and you get a tax credit for them.
With every sale you make on Shopify, you add the appropriate VAT rate to the transaction. The customer pays you the tax.
At the end of the season, once you’ve collected VAT from all your customers (“output taxes”), you prepare to send the VAT to the government. But first, you can discount all your input tax from the total, so that money goes back in your pocket.
If you’d like to learn about how VAT works in the EU specifically, check out our ultimate EU VAT guide.
Countries that have VAT on digital products: the EU, South Africa, South Korea, and others.
2. Goods and Services Tax
A Goods and Services tax (GST) is also levied at every step of the supply chain. But unlike VAT, GST is charged regardless of what value is added; it’s usually just a flat-rate percentage of the transaction.
In Australia, GST works like so: the businesses are charged at each stage of the manufacturing process, and the end customer is charged at the point of sale. The GST is then refunded to everyone through tax credits, except the end consumer.
Countries that have GST on digital products: Australia, New Zealand, India, and others.
3. Sales Tax
Known as just “sales tax”, this is a simple, one-time tax charged at the point of purchase. The money goes from the consumer, to the vendor, to the government, the end. This form of sales tax exists throughout the United States, determined at the state and local levels. (There is no overarching national sales tax in the US.)
Because the states and local municipalities can all decide their various rules, sales tax in the US is notoriously complicated… To understand how the system works, check out our primer on US sales tax on digital products.
* Some countries, like Japan, keep the general name “consumption tax.”
What is a tax threshold?
A tax threshold is a certain amount of sales revenue that marks when you must start paying digital taxes. Once your total sales in a country reaches or surpasses their tax threshold, be prepared to get your tax game on.
On the other hand, if your sales stay below the threshold, that usually means that you don’t need to register with the local tax authority, and you don’t need to worry about collecting or remitting taxes there.
Not every country has a tax threshold for digital products, though. In fact, many places don’t! That means that if you make even one sale — if you sell just one dollar or euro or rupee worth of product — then you must register for taxes in that country and comply with all the local tax standards.
If you’re curious which countries have a consumption tax on digital products, and which of those have a tax threshold, then check out the next section!
Digital taxes around the world
List of countries that have digital taxes, the rate and threshold.
|Country||VAT rate (%)||Threshold|
|AU Australia||10||AUD 75,000|
|CZ Czech Republic||21||None|
|IS Iceland||24||ISK 2,000,000|
|JP Japan||8||JPY 10,000,000|
|NZ New Zealand||15||NZD 60,000|
|NO Norway||25||NOK 50,000|
|SA Saudi Arabia||5||SAR 1,000,000|
|ZA South Africa||14||ZAR 50,000|
|KR South Korea||10||None|
|CH Switzerland||7.7||CHF 100,000|
|TW Taiwan||5||NTD 480,000|
|AE United Arab Emirates||5||AED 375,000|
|GB United Kingdom||20||None|
First and foremost: you should always issue a tax receipt to your buyer and keep a copy for your records.
A tax receipt is a legal document that records exactly how much consumption tax you’re charging and collecting from customers on each transaction. At the end of the tax season, these receipts inform how much output taxes you need to pay forward to the government.
A tax receipt is also used in filing returns if you made a purchase for your business and want to claim it as a tax deduction. Similarly, a tax receipt is what any of your B2B customers use to file their returns, if they want to claim your product as a deduction. So it’s important to get this right in Shopify, to make your life easier and to keep your customers happy.
Since they’re legal records, tax receipts must comply with the local tax policies, wherever your Shopify customer is based. For example, if you’re selling to customers in the EU, you must issue VAT invoices and tax receipts, which have their own quirks and requirements.
What to include in a tax receipt
Since requirements can vary from country to country, the easiest option may be to create a template that includes all the possible information.
A tax receipt should always include the following pieces of information:
- The name and address of the company or customer
- Your business name and address
- Your tax number (VAT, GST, etc., if you or your business must be registered in the customer’s country)
- A unique invoice reference number that can only refer to the invoice in question
- A date, usually the date the invoice was created (or “raised,” in accounting speak!)
- A list of the products and/or services you’ve provided. (List these line by line, with a quantity and separate cost for each)
- The amount of sales tax (also known as VAT or GST) for each item — or the total tax amount for the whole invoice, if every item is subject to the same rate
- The total amount of the invoice
- The payment terms, such as how long a customer has to pay, the channel of payment, etc.
To include as much of the above information as possible, you can customize your Shopify point of sale (POS) receipts. But these Shopify POS receipts still won’t satisfy tax requirements. For a solution to this tedious problem, check out the last section about how Quaderno can help!
Digital taxes on Shopify: tips and tricks
What Shopify will handle:
Digital tax collection
Shopify will collect consumption taxes for you, but you must configure your store to do so. Thankfully, Shopify has easy steps for enabling all of EU VAT and all of US sales tax, so you can knock out 28 countries and 50 states with one setting.
Here are the instructions for enabling EU VAT in your Shopify store. And here are the instructions for setting up automatic US tax rates.
For other places that have digital taxes, you must change those settings manually. Here’s the gist: you add each country or region where you have customers to your Shopify store’s Shipping Zones. Then, in the “Taxes” section, you can set individual tax rates for each shipping zone.
It’s a bit tricky and tedious… But if you aren’t using an automated tax plug-in for Shopify, then these little steps are necessary. Here are Shopify’s instructions for setting up non-US and non-EU tax rates.
You can also configure your Shopify store to ignore sales tax on certain digital products that are exempt. (Exemptions vary from country to country!)
Follow these simple instructions for exempting a digital product from tax on Shopify.
List taxes separately from product price
You have the choice of including consumption tax in the price of your product, or listing it separately at checkout. Choose wisely. Both risk losing customers if not done correctly.
The first option could make your products seem more expensive than a competitor’s. The second option could surprise your customer with an unexpected cost increase, right before the point of purchase. This unpleasant surprise kills conversion rates at the shopping cart; people just click away from the checkout page.
Our solution? If you need to charge VAT, GST, or some other sales tax on your digital products, a good practice is to give a heads-up on the product page that tax will be added later. For example, say that the price is $9.99 + sales taxes at checkout.
This way the customer knows about a possible cost increase, before she even gets to her cart. And the upside for you is that you can still list your products at their original price!
What it won’t handle:
No native tax receipts
Though Shopify does let you customize your store’s receipts with your logo and other information, it does not go all the way with tax receipt information. This limitation could be a hassle for you, especially if you sell to a lot of B2B customers.
The easiest way forward would be to use a Shopify plug-in for automatic tax receipts, offered by a third party. We may be biased, but we think Quaderno’s Shopify plug-in is the perfect solution. :)
No tax reports to help you file your returns
Shopify doesn’t offer tax reports that include all the accurate information you need to file returns quickly and confidently. When tax season comes around, you have to rifle through your Shopify sales data to get tax information, to total the output VAT you’ve collected, etc.
If that sounds like a headache, that’s because it usually is… But again, we know of a pretty great solution. Read on to figure out how to simplify your tax returns in one click.
Instant tax reports in Shopify
We mean it when we say instant tax reports! With the click of a button, you can have everything you need for filing a tax return, at a glance.
Quaderno collects all the necessary information for filing US sales tax, VAT, and GST — and displays it in a way you can actually understand. You can rest easy knowing that these instant tax reports are accurate and up-to-date. Quaderno complies with every little tax rule in the US, Canada, Australia, New Zealand, Singapore, and the EU.
In a nutshell, the Quaderno plug-in will cover the issues that Shopify cannot. In fact, we’ll close the gap and solve all your tax-filing woes, even beyond Shopify.
More than likely, you also use other channels for online selling, right? So you would have to combine the Shopify data with everything you’ve culled from Amazon, PayPal, and others.
The beauty of Quaderno is that once you’re using it with Shopify, you can easily integrate it with these other channels — so that all of your tax information is clear and accessible! And all of it can be delivered in an easy tax report, with the click of a button.
How to integrate Quaderno with your Shopify store
1) From your Quaderno dashboard, go to Integrations. Select Shopify from the “Shopping carts” section.
2) Simply enter the name of your Shopify store in the space provided, then click “Connect account.”
3) The next screen is a verification with Shopify that you want to install Quaderno with your store. Simply click “Install app,” and then you’ll see a confirmation page that the account is connected.
4) Back on the integrations page, you’ll see “CONNECTED” listed over Shopify -- and you’ll know the process is complete!
The integration is equally as simple for the other channels and platforms you see listed above. Our goal is to save you time and stress, so that you can focus on growing your Shopify store and keeping your customers happy. Sign up for Quaderno’s free trial and see what business is like when we handle the taxes.
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