Tax is the part of selling digital products most sellers learn about late. The rules differ from physical goods in one way that matters most: for digital products sold to consumers, the tax usually follows the buyer, not the seller. A seller can owe VAT in a country they’ve never set foot in. This guide explains the well-established basics so you know what to ask and who to ask.
This guide explains well-established rules in general terms. It is not tax advice. Rates, thresholds and registration rules change and depend on where you and your buyers are: check with an accountant who knows digital sales.
Who pays tax on digital downloads?
The buyer pays it, as part of what they’re charged. The seller is the one who has to charge it, file returns and send it to the tax authority. Who counts as “the seller” depends on how you take payments:
- You’re the seller of record when buyers pay your own payment account. The tax is yours.
- A merchant of record resells your product to the buyer and takes the tax on: it charges, files and remits. You’re paid your share and report that as income.
VAT on digital products in the EU
The EU taxes digital services sold to consumers where the consumer is. A buyer in one EU country is charged that country’s VAT rate, whether you’re based in another EU country or outside the EU. EU-based sellers with very small cross-border sales may have a simpler option; ask your accountant whether it applies to you.
Three points come up for digital sellers again and again:
- Consumers or businesses. A sale to a business with a valid VAT number is usually handled under the reverse charge: the business accounts for the VAT itself.
- Proof of location. You’re expected to keep evidence of where each consumer is, such as their billing address and IP country.
- What counts as digital. Downloads, keys delivered online, streaming and online access are generally treated as digital services. Live teaching or other human work can be treated differently.
EU VAT OSS for digital goods
The One-Stop Shop (OSS) lets you register for VAT in one EU country and declare and pay the VAT on sales to consumers across the EU in one return there, instead of registering in every country you sell to. It has a Union scheme for sellers established in the EU and a non-Union scheme for sellers outside it. OSS replaced the older Mini One-Stop Shop (MOSS). Your accountant can tell you which scheme fits and how often you file.
Sales tax on digital products in the US
The US has no national sales tax. Each state decides whether digital products are taxable and how it defines them: a downloaded ebook, software, streaming and a subscription can each be treated differently from one state to the next. Since the Supreme Court’s Wayfair decision, states can require out-of-state sellers to collect sales tax once they pass the state’s own thresholds, even with no physical presence there. Local taxes can apply on top. Keep a record of each buyer’s state, and talk to an accountant before your US sales grow.
Other countries
The UK and many other countries also tax digital services sold to their consumers, often through a registration for foreign sellers. If you sell worldwide, the list of places where you might owe tax gets long quickly. That’s the main reason sellers look at a merchant of record.
Seller of record or merchant of record
| Your own gateway (seller of record) | Merchant of record | |
|---|---|---|
| Who sells to the buyer | You | The merchant of record |
| Who charges tax at checkout | You, where you’re required to | The merchant of record |
| Who files and remits | You | The merchant of record |
| Who deals with chargebacks | You, under your processor’s rules | The merchant of record, with the processor |
| What you report | Your sales, and the tax you collected | Your payouts, as income |
Some payment providers act this way for their own sales. Paddle, one of the gateways ShopFast connects, handles sales tax on its payments: buyers pay your price, and Paddle takes the tax and its fee out of it. More on each gateway is in payment methods for digital products, and the term is defined in the digital products glossary.
How tax works on ShopFast
- Your own gateway. You’re the seller of record, whether buyers pay through Stripe, PayPal or crypto to your own wallet. ShopFast adds no tax at checkout and remits nothing: charge, file and remit tax the way your business and the buyer’s country require. ShopFast takes no fee on those orders.
- ShopFast Pay, by application. ShopFast is the merchant of record. Checkout adds the tax for the buyer’s country on top of the order total, it’s recorded apart from your share, and ShopFast files and remits it. You don’t register for VAT or sales tax for those sales; you report your payouts as income (ShopFast Pay, payment models).
- Reports. Financials → Tax report lists sales by buyer country with the tax collected and who remitted it, and exports as CSV with your statements. Per-product tax categories exist for products taxed differently.
The details are in taxes. Refunds affect what you collected, so keep your refund policy and your tax records in step.
Questions to take to your accountant
- In which countries and states do I need to register, given where my buyers are?
- Do my products count as digital services everywhere I sell?
- What evidence of each buyer’s location must I keep, and for how long?
- How should I handle business buyers with VAT numbers?
- Would a merchant of record cost me less than handling tax myself?
- How do I report my sales or payouts as income?
Bring your tax report to that conversation. If you’re still deciding how to set up your store, start with how to sell digital products.
Questions sellers ask
Do I charge VAT on digital products sold to EU customers?
Generally yes, for sales to consumers: VAT at the rate of the buyer's country. Sales to businesses with a valid VAT number usually fall under the reverse charge. Check your own situation with an accountant.
What is the EU VAT One-Stop Shop?
OSS lets you register in one EU country and declare and pay the VAT on sales to consumers across the EU in a single return there. Sellers outside the EU use its non-Union scheme.
Do US states charge sales tax on digital products?
Some do and some don't, and they define digital products differently. States can also require out-of-state sellers to collect once they pass the state's own thresholds.
What is a merchant of record?
The business that legally sells to the buyer, and so charges, files and remits the tax and deals with chargebacks. With your own gateway, that's you.
Does ShopFast collect sales tax and VAT for me?
Not on orders paid through your own gateway: ShopFast adds no tax there and remits nothing. With ShopFast Pay, available by application, ShopFast is the merchant of record and collects and remits it.
Who pays tax on digital downloads?
The buyer pays it as part of what they're charged, but the seller, or a merchant of record selling on the seller's behalf, has to charge it, file returns and remit it.