Tuesday, December 17, 2019

Notes on tax issues on selling digital goods internationally

Note: This blog post should not be considered tax, legal or any other sort of advice. There are no guarantees of any kind, even that any of the information below is correct. Consult a qualified professional before embarking on any international business ventures.

Some tax requirements for selling pretty much anything internationally (that I found out by googling and looking up random government web sites)

Nowadays it is easy to start a web store and sell products such as digital downloads to any country in the world. You might think that simply paying appropriate taxes in your own country would be enough. It's not. There are cases where you need to pay taxes or fees to other countries as well, specifically the ones you sell your products to. Surprisingly this can be the case even for very small amounts of money.

There seem to be three main cases: USA, the EU and individual countries. Let's go through them in increasing order of difficulty.

Individual countries

Most countries have a requirement that if you sell digital goods to them you need to register in said country, collect the appropriate amount of tax on your sales and then report and pay it. Most countries have a lower limit under which you don't need to do anything. This is usually on the order of 10 000 to 100 000 euros per year, which small scale operations won't ever reach. Unfortunately in some countries this limit is zero. That is, if your sales are even one euro, you need to register and do the full bureaucratic dance. These countries include Albania, Russia, South Korea and India among others. Lists of limits per country can be found online. Be careful when reading them, though, as web pages can get out of date quickly.

For small businesses the only realistic choice is to geoblock countries where the tax limit is zero. Dealing with the hassles is just not worth it. This is fairly easy, as most payment providers have good geoblocking tools.

VAT in the European Union

In the EU you can do the same registration to each country as for individual countries discussed above. However there is also a new, simplified system for digital services called VAT MOSS. The idea there is that you don't need to register to each country, instead you can report VAT purchases to your own tax authorities and they take care of the rest. This is highly convenient, because you can then sell to every EU member state but only have to deal with the bureaucracy of one of them.

There is a similar thing for non-EU companies, but I have not looked at how it works in detail for obvious reasons. Just note that the registration limit for EU is also zero, meaning if you must register if you sell anything at all to the EU. Sadly this means that for some people geoblocking all of EU is an entire reasonable thing to do.

Sales tax in the USA

The good news is that the USA does not have a federal sales tax. The bad news is that each state has its own laws on sales taxes. Whether or not you need to pay sales taxes on a given state depends on whether you have a "nexus" in the state. This used to mean something like an office. However then buying stuff over the Internet happened and now having a nexus simply means selling more than a given threshold's worth of goods or services to people in the state. Lists of these limits per state can be found online as well.

This is where things get unpleasant for small players. The limit for Kansas is zero, meaning any sales to Kansas means you have to register, gather sales tax and pay it to the state authorities. Other states have reasonable limits such as 100 000 dollars, but the obligation is also triggered if you have more than 200 sales events in total regardless of their value. This is a lot easier to trigger by accident.

Unfortunately payment processors don't seem to provide state-based geoblocking. Thus if you enable sales to the USA and that leads to even one sale in Kansas, you just got hit by a bunch of legal requirements. Dealing with all of these is not really feasible for small operations. On the other hand blocking all of USA means losing a fairly large chunk of your revenue.

To keep things from being too simple, there are web pages that claim that having an "economic nexus" is actually different for digital products. Based on that page Kansas does not have a sales tax at all for purely digital products, so you could sell arbitrary amount of products there without needing to pay any sales tax. Which one of these is correct? I don't actually know. I have spent the entire day reading up on international tax laws and now my head hurts and I just want to close the computer and have a drink.

What does this mean for tipping services like Patreon, crowdfunding et al?

Again: I don't really know. However a case can reasonably be made (at least by a tax collector that wants to get your money) that paying through one of those platforms constitutes a "sale of services" or something similar and thus subject to a sales tax. For example Patreon's documentation page states that they take care of paying VAT for EU customers but that customers in the USA need to take care of their tax responsibilities themselves. Presumably this also applies to all other countries.

Thus it may be the case that everyone who is running a tipping service and has taken any money from countries or states with a zero limit on sales taxes have unexpectedly been burdened with legal responsibilities to tens of different tax offices around the world.

In any case all of this means that things like gathering funds for open source development is a lot more complicated than appears at first glance.

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