What Are Digital Products?
You are planning to have customers in the EU but are not sure if you should be charging VAT for your digital products? Digital products may be subjected to VAT regardless of whether your business is located inside or outside the EU.
According to the European Commission, digital products are officially called electronically supplied services and defines them as “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.”
If your product is virtual, cannot be felt, carried or packaged to be sent to your customers, they are categorized as digital products.
Types of Digital Products
Check to see if your products or services are listed.
- E-books, images, movies, and videos, whether buying a copy off of Amazon or using a service like Netflix. In tax language, these products are in a category usually called, “Audio, visual, or audio-visual products.”
- 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). If you’re running a subscription service (such as what we do at Vatstack), the service is most likely subject to VAT.
- 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.
- Websites, site hosting services, and internet service providers.
If your product falls into one of the categories above, your only concern now is to charge the correct VAT rate. Each member state of the EU has its own VAT rate. You therefore have to obtain your customer’s country of residence first, before you can apply the VAT. The customer’s location is where the chargeable event takes place, not your business’ location.
If your customer is a business, she needs to be able to provide her unique VAT identification number to remove that VAT. That’s because businesses are generally not surcharged a VAT. You need to take special precautions when accepting VAT ID numbers from customers as their validity need to be confirmed.
Are Online Courses Subject to EU VAT?
The usual answer here is: it depends. That’s why you’ll want to be extra careful in how you want to structure and deliver your online courses. Whether you’re teaching marketing, yoga or cooking classes online, your students may have to pay consumption tax when they purchase your course.
The determinant factor to decide whether your online course is subjected to VAT is in how far your service is automated. These EU explanatory notes will help clarify: “Automated distance teaching dependent on the Internet or similar electronic network to function and the supply of which requires limited or no human intervention, including virtual classrooms, except where the Internet or similar electronic network is used as a tool simply for communication between the teacher and student”.
If you’re letting your students download materials and never intend to teach them one-on-one during a live webinar, your service renders itself as fully automated without human intervention. Automated distance teaching is subject to VAT. If, however, the downloaded materials are merely considered workbooks to support a webinar hosted by online tutors with live Q&A’s, your service may be exempt from VAT. To be absolutely certain, please consult your tax advisor.
VAT on Digital Products
In the physical world, goods entering the EU are taxed at the customs before they are released for pickup or delivery to the customer. In the digital world, there are no borders at which taxation could take place. Therefore, European lawmakers have decided that the businesses themselves are held accountable for applying and collecting the correct VAT rate on their behalf.
Every calendar quarter, businesses have to file EU VAT returns to remit the VAT they have collected during the preceding quarter. Certain digital products are even eligible to a reduced VAT rate in some EU countries.
How Vatstack Can Help You Stay Compliant
Teaching online is a noble profession, and more and more businesses are selling digital products online. Vatstack already helps small startups and large Fortune 500 companies charge the correct local VAT rate applicable to their customers’ location, and validate VAT ID numbers with the databases of EU member states. Learn how you can also implement compliant checkout procedures for your EU customers.