Digital Consultant’s Guide to Sales Tax, VAT, and GST
This article was originally published on the Quaderno blog. Click here to see the original one and access bonus content with it.
As a digital consultant, your business is all about helping other people level up, to optimize their businesses and become the best versions of themselves.
The only way you’ve come this far is because you think strategically and you make smart decisions. You put in place systems that minimize workload and maximize productivity.
The question is:
How have you applied this business savvy to your own consumption tax processes?
Yep, you might have some liability when it comes to sales tax, VAT, and GST. These days the world’s biggest economies all have digital tax laws that could implicate your business. More countries join the ranks every day.
And we get it! Scaling an online consultancy business doesn’t leave a lot of room for studying digital tax laws around the world. Much less keeping up with tax rates, calculation, proper documentation, and filing returns.
We’ve done a lot of the work for you. 😉
In this post, we’ll walk through each level of a digital consultant’s standard service offering and explain the potential liability for US sales tax, EU VAT, and taxes in many other countries.
The sooner you get on top of your tax obligations, the more time — and peace of mind — you’ll have to focus on your clients and build the business you love.
Let’s get started!
The digital consultant’s value ladder
The typical digital consultant business model is a suite of services that escalate from hands-off, lower priced, and widely applicable items (such as an ebook) to higher touch, big-ticket, and customized offerings.
The services, when structured in this ascending order, are called a value ladder. The standard value ladder for digital consultants looks like this:
- Membership site
- Online course
- Group coaching (e.g. Mastermind)
- One-on-one consulting
- Custom Do-It-For-You services
Your value ladder and products might be slightly different. You might offer some of these and not others. That’s all good!
Even if you don’t recognize your specific business in the general outline above, the tax rules we describe below are likely still relevant for your business in some way.
First, a quick overview of the types of tax you might encounter as your business scales.
Types of sales tax around the world
Nearly every country in the world applies a consumption tax to sales of goods and services.
There are different kinds of consumption taxes, depending on the country. But one element always stays the same. The end customer pays the tax, because they are who’s actually consuming the end product. And it’s a tax on consumption, on buying for one’s personal use.
Consumption taxes go by a few names, and they each function a little differently. There’s the Value-Added Tax in the EU, and the Goods and Services Tax in Australia. These are better known as VAT and GST. Most countries have one or the other.
The United States has a system of its own. US sales tax is a consumption tax that’s theoretically only charged once, at the final purchase of the final product by the end consumer.
However the country has no national level sales tax. Instead, sales tax is regulated by each individual state. This creates a ton of complexity (and confusion!) in the US sales tax system.
Tax liability for a digital consultant’s services
As a general rule, you’re likely required to register for sales tax, VAT, or GST in any jurisdiction where:
- You or your offices are physically located
- Your employees are located
- You employ certain affiliate or digital marketing activities (US only. See nexus rules.)
Another general rule is that how much you sell is just as important as what you sell. Always check tax registration threshold and US nexus rules. Learn about this in the next section!
In addition to these two rules, each service can have its own particular tax implications.
Let’s travel up the value ladder and explore how each offering might be subject to sales tax, VAT, or GST.
As a general rule, ebooks and other downloadables are taxable. Their taxation usually goes one of these 3 routes:
- Tax exempt or zero-rated because, well, it’s a book! And when books are considered educational products, some countries don’t tax them.
- Taxed at a lower rate than other digital goods, because it’s classified primarily as a book, which are in a reduced tax class.
- Taxed at the same rate as other digital or physical goods.
For example, the EU taxes ebooks at the same rate as traditional print books. That said, each individual member state can set its own VAT rate. These rates vary from Italy’s 4% to Hungary’s 27%.
Australia requires that the standard 10% GST is charged on all ebook sales.
In the US, each state decides whether to include ebooks in its tax laws for digital goods. It can result in all kinds of scenarios:
- In Alabama, digital downloads are considered “tangible personal property” and therefore taxable at the same rate as physical goods.
- In Connecticut, digital downloads are taxed at a reduced rate of 1%, as opposed to the state’s usual 6.35%.
- In New York, some e-books are taxable and others aren’t. It all depends on the state’s tricky technicalities…
- In Virginia, digital products are exempt from sales tax altogether.
Be sure to research how each state taxes digital goods and check whether your ebook is included in their definition.
2. Membership site
Membership sites are tricky. Taxability can depend on the extent of hands-on, interactive services you provide to members.
- If you provide access to automated content, like pre-recorded courses and webinars, your membership fees might be liable for consumption tax.
- Any e-commerce component of your site, where members can purchase downloadables or physical merchandise, will surely be subject to consumption tax.
Ultimately, your tax obligations will depend on whether you hit the tax registration thresholds or, in US states, achieve economic nexus. More on this in the next section!
3. Online course
Taxability of online courses generally comes down to a couple attributes.
- Downloadable vs. Pre-Recorded vs. Live Webinars
Generally, live webinars are not taxed as digital products. As for downloadable and pre-recorded, it varies from state to state. Some policies will even distinguish between streamed or downloaded, even though both are technically “delivered electronically.”
- Fully automated vs. Interaction with and among students
Is there an interactive element, either between other students or with the instructor? Is there a live tutoring component? Is there an evaluation that’s conducted by a human, rather than a computer? This is a key point of automation. Generally, automated online courses are subject to digital tax, whereas courses with human interaction are not.
In the EU, online courses are taxable if they are automatic, delivered electronically, and have no human interaction. They’re taxed at standard VAT rates for digital goods and services. Each member state can set its own rate, and these vary from 15–27%.
In the US, as you might have guessed, it depends from state to state. Some don’t tax any online courses, others tax all of them. Twenty-four states have adopted the Streamlined Sales and Use Tax Agreement (SSUTA) guidelines for online courses and webinars. If your business meets one of the following, your courses are not taxable:
NOT TAXED: “Live Digital Online Educational Services” are not taxed. So, if you present the course or seminar live in real time, then it’s not subject to sales tax.
NOT TAXED: “The participants are connected to other participants and presenters via Internet or other networks, allowing the participants to provide, receive, and discuss information together by live interaction, contemporaneous with the presentation.”
NOT TAXED: “The participant is evaluated by an instructor. ‘Evaluated by an instructor’ does not include being graded by, scored by, or evaluated by a computer program or an interactive, automated method.”
Finally, some countries require consumption tax on any online course, regardless of whether it’s live or automated! For example, Australia and New Zealand’s tax policies say that GST applies to “webinars or distance learning courses”; it doesn’t name any exemptions.
You can read more digital taxes for online courses, but always double check with the specific countries where you’re selling and with a tax professional, if necessary!
4. Group coaching (e.g. Mastermind)
Since group coaching often involves live, personal interaction with your clients, it’s likely not subject to digital tax laws. However, your group coaching might be considered “business services” or “personal services”. These categories have their own tax laws in most jurisdictions.
Mastermind.com even includes a note about complying with US sales tax in its Code of Ethics. (See Point 6.)
You should double check the laws in any country where your customers are located. If your services are taxable, then you should check the local tax registration thresholds. We’ll cover this topic in the next section.
5. One-on-one consulting
As of now, one-on-one digital consulting is not explicitly included in digital tax laws. But much like group coaching, your 1:1 consulting might be considered “business services” or “personal services”. These categories have their own tax laws in most jurisdictions.
You’ll need to register and start charging consumption tax only if you surpass local registration thresholds or, in US states, acquire nexus. Learn about this in the next section.
6. Custom Do-It-For-You services
Maybe you craft special, customized offerings for a company, solo entrepreneur, or other aspirational person on the road of self-development. That’s great! Such white glove offerings usually fall under “business services” or “personal services”, and are taxable in some jurisdictions.
Again, you’ll only need to register in a new tax location and start charging consumption tax if you surpass its registration thresholds or, in US states, acquire nexus. Everything you need to know about that is below.
Tax registration thresholds for digital consultants
It’s not just the laws we’ve reviewed above that determine whether or not you need to start charging consumption tax.
Tax liability also hinges on how much your business is selling. Of course, when business booms, tax agencies want their cut! On the other hand, if you only sell a small to moderate amount, the authorities might not burden you with any tax obligations.
This tipping point in your sales is often called a tax threshold, or tax registration threshold. It’s a fixed amount of money in that country’s currency.
Once your taxable sales pass the threshold amount, then your business is required to register for local taxes. If you stay below the threshold, you’re scott-free.
Which sales count? Typically, only the sales made to private residents within that specific country. B2B sales generally do not count because they follow the reverse-charge mechanism.
In what time frame? Definitions often refer to “annual sales,” but this could mean two things. It could mean sales within a single calendar year, or sales within any twelve-month period. The latter is on a rolling basis, so it could be the amount you sold in the last 12 months or are projected to sell in the next 12 months.
In the US, there are tax registration thresholds based on volume of sales and the number of transactions in the state. For example, in South Dakota, retailers with annual sales exceeding $100,000 or with more than 200 separate transactions in the state must register for a sales tax permit and start collecting.
The concept is called economic nexus and it applies to remote sellers like you. Check the rules in each individual state where you’re selling.
The tax compliance solution for digital consultants
The rules we laid out above are only the beginning. More countries and US states are trying to increase tax revenue, which means widening the scope of what’s taxable — and casting a wider net to catch online businesses for tax liability.
Be your own client for a second.
Wouldn’t you recommend delegating all of this confusing, time-consuming tax compliance stuff to someone else?
If there’s a cost-effective way to automate 95% of it, that’s a no-brainer, right?
Quaderno does exactly that. We automate your tax compliance processes so you save time, avoid stress, and can focus on the work you love.
Once you connect your business platforms and payment processors (a matter of minutes), Quaderno handles the following for you automatically:
- Calculates the right amount of tax on each sale, directly on your checkout page.
- Verifies customer tax IDs.
- Collects and stores the customer location evidence that you need from every sale.
- Creates and sends invoices that are customized to your brand, in multiple languages and currencies.
- Tracks your sales in all jurisdictions, and notifies you when you approach a tax registration threshold.
- Alerts you when any tax policies or rates change, so you’re always in the loop.
- Provides instant, easy-to-read financial and tax reports that make filing returns just a matter of data entry.
We have a suite of integrations for digital consultants and entrepreneurs like you. For online courses, we integrate with Kajabi, Thinkific, and Teachable. For membership sites, there’s also Mighty Networks, S2 Member, and AccessAlly. Plus many more e-commerce platforms.
Let us help you unlock that next level of entrepreneurship. Try Quaderno free for 7 days.
* 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 accountant.