Growing as a creator educator? That’s great news!
But have you thought about your taxes yet?
As an online business, your tax obligation depends on a lot of different factors: the types of products you sell, where you’re located, where your customers are located—and this varies by jurisdiction across the US and Canada. Needless to say, it’s complicated.
Have enough on your plate as a business owner? Get the most important top tax takeaways below.
The world of taxation isn’t always straightforward at the outset. Take the case of America. The Streamlined Sales and Use Tax Agreement (SSUTA) provides information about digital taxation; if you observe, there’s quite a bit of variation within the US itself.
Wisconsin’s law, for instance, clarifies that taxes don’t apply to “Live Digital Online Educational Services.” Therefore, in Wisconsin, in circumstances where an actual human evaluates students, or you present your course as a seminar in real-time, or you connect with your students live, you don’t have to pay taxes. Alternatively, if your digital product is a pre-recorded and automated online course, and if you have downloadable files, you may have to add tax.
So, let’s set things straight: Whether you’ll need to add taxes to your pricing or not depends on where your customers live, what kind of digital products you sell, how you market or deliver them, and if you establish a relationship (aka nexus) with a tax jurisdiction.
We know all this can distract from your prime responsibilities – creating unique content and ensuring you spread knowledge. That’s why we’ve compiled this blog to help you understand the world of digital service tax, focused on the US and Canada.
- What is a digital service tax, and who needs to pay it?
- What determines whether you’re liable to charge tax on digital products?
- What is a tax nexus?
- How to determine your customers’ location so that you add taxes correctly
- Overwhelmed? Tax on digital products doesn’t have to be hard
- Wrap Up
A digital sales tax (also known as e-commerce or digital transaction tax, or digital service tax) is a charge levied on the online sales of digital products or services. Governments use it to fund public services and programs. Digital service taxes, by design, offer fairness and a level-playing field to brick-and-mortar businesses vis-a-vis digital businesses. After all, the former shouldn’t be the only ones who need to add taxes, while digital sellers find ways to get around tax rules.
Speaking in general terms, most governments worldwide levy digital service taxes as a percentage of the revenue their citizens earn from selling your courses or subscriptions. Technically, this is something you, as a creator, add to the price of your digital product. However, calculating it accurately can get confusing.
Tax on digital products varies across states and countries.
While you can sell digital products quickly across borders, the complexities creep in when it comes to handling billing and taxation. Some jurisdictions set minimum revenue thresholds to pay taxes. This means you can be exempt from paying taxes if you make less money than the established threshold. With that, here are some facts to note:
- Nearly all US states levy a sales tax on digital goods and services, except for Delaware, Montana, New Hampshire, and Oregon, on certain digital products and services.
- In Georgia, New York, Pennsylvania, and Missouri, most digital products and services are taxable. However, you are exempted if you sell eBooks or educational materials.
- Kansas taxes all digital goods and services except newspapers and magazines.
Whether or not you need to pay taxes on your digital product sales depends on several factors. These include:
- The location of your students: If they’re located in regions where digital products are exempted from taxes, you don’t have to add taxes to your pricing.
- Type of digital products: Streamable and downloadable content is usually taxed. Some states and countries offer tax exemptions for live lessons. Other jurisdictions have different tax governance regarding online advertising and cloud computing. Some may even penalize you if you classify your digital products under the wrong category. So, you’ll need to double-check before filing your returns, as mistakes can be costly.
- Nexus: The nexus is the tax-related relationship between a US state and a business. You can develop a nexus between a US state by maintaining a physical presence there, having employees in that state, or meeting other criteria which greatly vary. Once you establish a tax nexus, you need to add sales tax on your digital product sales in that particular state. We’ll cover this in more detail below.
- Product bundles: If you sell courses and other products in bundles and only a few of the products in that bundle are taxable, you’ll need to be careful about accurate invoicing concerning your product.
- Compliance: Digital products are relatively new to tax officials, and many states are revising and reformulating their drafts. To be safer, you need to follow up with your jurisdiction’s digital service tax rules and changes made to them and keep a record of all sales and tax-related payments.
Of all the points mentioned above, you should know a little more about tax nexus. This is because if you establish a nexus with a US state, you will need to add taxes on top of your course fee to ensure compliance.
A tax nexus is a relationship between a business and an American tax jurisdiction. If you are located in the US, you may develop a tax nexus with a US state. This qualifies you to add sales taxes to customers in that particular state. Alternatively, if you are not located outside the US, you may establish a nexus if you cross certain revenue thresholds originating in a US state (i.e., most of your customers are from a particular US state).
Here are a number of ways to establish a tax nexus with a state:
- Physical presence nexus: If you are located in a particular US state or have an employee or office in that specific state, you may qualify for a nexus.
- Affiliate nexus: You can qualify for an affiliate nexus if you are affiliated with an individual or business in the state and your students sign-up using this relationship. In other words, if you have a referral system that directs your students to your online course through affiliate relationships based in a particular US state, you may qualify for a nexus. Some states with provisions for an affiliate nexus rule are California, Connecticut, Maine, Missouri, etc.
- Minimum sales threshold: Many US states have a minimum sales threshold, making you exempt from taxes if your gross sales do not surpass the threshold. For example, if you make $100,000 in annual sales or carry out 200 separate sales transactions in one of those states, you may be deemed to have a nexus with that state and become liable to add sales tax (even if you reside abroad). Other nexuses can include those based on click-through sign-ups, web cookies, and economic nexuses. Economic nexus was confirmed during the Supreme Court Wayfair decision in 2018.
As you can see, the location of your customer matters too. As customers for digital products often come from various parts of the world, including the US, you need to know their location before you add taxes as a markup on your digital product’s price.
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Now if your students are spread across the globe, how would you accurately know how much sales tax to add to your bill?
Identifying digital product sales information can help you determine if you have established a tax nexus. This also lets you understand if your students need to pay sales taxes or are exempt, depending on the state or country they live in. Some ways to detect the sales location of customers include tracking:
- Billing address: When you onboard customers, you record their country and zip/postal code during checkout. This information helps you determine whether you need to pay a double tax.
- IP address: Your customers’ IP address is valuable information to detect their location. However, Virtual Private Networks (VPNs) and other technologies often mask it, making it less reliable than other methods.
- Credit card issuer address: If your customer’s billing address and IP address do not match, you can source your sales based on the credit card issuer’s address. Although this does not give accurate information about the customer’s location, it’s considered a reliable form of determining the source of sales.
- Delivery address: It’s the gold standard for 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 products. People sometimes enter an incorrect address and make successful payments for several reasons. Hence, we’d say take this bit of information with a grain of salt.
The most accurate methods of determining the source of sales are the billing and the credit card issuer’s address. If both match, you can add a sales tax to your pricing accordingly.
Navigating taxes on digital products can feel challenging; we feel you! The complexities of differing rules and regulations across borders can add an additional burden on your business. You can’t get around the fact that you will eventually hire a tax consultant or use a software tool to automate tax collection on your course subscriptions and invoices. In that vein, here are a few things you can do to simplify this essential business activity:
- Include taxes in your course pricing after speaking with a tax consultant. Add a note in your course description which clarifies that your pricing is tax inclusive. It can even be a great selling strategy as it adds transparency.
- Leverage TCommerce. It allows you to check where your customers are paying your invoices from. The Transaction Report displays the country and the zip code so that you can determine if you are obligated to add taxes to your pricing.
Instead of worrying about which tax you need to add to your invoices, you can use our tax-inclusive platform. Modern-day creator platforms like Thinkific have built-in checkout to help you raise invoices that include taxes. You can also integrate Thinkific with other tools, such as:
- Quaderno: Quaderno helps you set up custom fields to be collected from students during checkout (such as location) You can use Quaderno only when you use PayPal or Stripe. If you are a Thinkific user, you get a 7-day free trial to try out Quaderno and see if it works for you.
- InvoiceBus: InvoiceBus calculates the correct tax amount but only supports Stripe.
As a digital creator educator; there’s much to do. From planning your informational product to figuring out marketing, billing, and finances, and over that, managing compliances like taxes can get overwhelming.
What makes taxes even more challenging is that rules are often constantly changing across the world. After all, the definition of digital products and how they are taxed evolves across borders. If you’re looking to focus on your core business(where your time and effort matter most), it’s best to choose a platform that simplifies such compliance-related aspects for you.
At Thinkific, we strive to make this process as smooth, intuitive, and automated as possible to help creators navigate taxes right from our interface. Learn more about charging taxes using our creator-friendly platform here.
Disclaimer: While Thinkific has made every effort to ensure that the information in this blog is accurate at the time of publishing, Thinkific does not assume responsibility for readers’ tax decisions or actions resulting from the information in this blog.