VAT, Sales Tax, and Digital Goods: A Practical Primer
Selling software across borders means running into tax rules that were never designed with software in mind. Here's the shape of the problem.
Tax on digital goods is one of those subjects that seems simple from a distance and gets genuinely complicated the moment you sell to more than one country. This is a primer on the shape of the problem, not a substitute for advice from a tax professional about your specific situation — the rules below are general patterns, and jurisdictions change them without much warning.
The core idea: tax follows the buyer, not the seller
For most digital goods and services — software subscriptions, downloads, SaaS access — the tax that applies is determined by where the buyer is located, not where the seller's company is incorporated. This is the opposite of how sales tax often works for physical goods in some jurisdictions, and it's the single most important fact to internalize: a company based in one country, selling to a buyer in another, is very often still on the hook for tax obligations in the buyer's jurisdiction.
VAT (EU, UK, and elsewhere)
Value-added tax applies to digital services sold to consumers in the EU and UK (and a growing list of other jurisdictions with similar rules) regardless of where the seller is based. The seller is generally expected to:
- Determine the buyer's location (multiple, corroborating pieces of evidence are typically required — not just a self-reported country field)
- Apply the correct VAT rate for that buyer's country (rates differ by country, and sometimes by product category)
- Collect that VAT as part of the price
- Remit it — often through a simplified single registration scheme (the EU's "One-Stop Shop" mechanism is the relevant example) rather than registering separately in every member state
Sales to VAT-registered businesses (B2B) are often handled differently — sometimes shifting the tax obligation to the buyer under a reverse-charge mechanism — which is why collecting and validating a buyer's VAT/tax ID matters, not just their country.
US sales tax
The United States has no federal VAT; instead, sales tax is a state-and-sometimes-local matter, and whether digital goods are taxable at all varies by state — some tax software and digital subscriptions the same as physical goods, some exempt certain categories, and the definitions genuinely differ state to state. A seller's obligation to collect in a given state generally depends on "nexus" — a connection to that state significant enough (historically physical presence, now often a sales-volume or transaction-count threshold following economic nexus rules) to trigger a registration requirement.
This means a US-focused digital seller can accumulate tax obligations in dozens of separate state jurisdictions as sales volume grows, each with its own registration, filing cadence, and rate structure.
GST and other regimes
Countries outside the EU/UK and US — Australia, Canada, and a growing number of others — have their own goods-and-services-tax or VAT-equivalent regimes for digital services, frequently modeled on the same "tax follows the buyer" principle but with their own registration thresholds, rates, and filing requirements.
Why this is genuinely hard to do correctly in-house
Doing this well requires, at minimum: reliable buyer-location determination, an up-to-date rate table across every jurisdiction sold into, correct handling of B2B vs. B2C treatment, registration in every jurisdiction that requires it once a threshold is crossed, and a filing/remittance process that doesn't fall behind as rules change. None of this is a one-time setup — rates and thresholds change, and a seller expanding into new markets accumulates new obligations continuously.
Two ways to handle it
A company can build and maintain this capability itself — registering directly in each relevant jurisdiction, maintaining its own rate tables, and filing its own returns — which is a real, ongoing operational commitment, not a one-time integration.
Or a merchant-of-record platform can take on the determination, collection, and remittance as part of standing in as the seller on the transaction — which is one of the specific things that arrangement is designed to absorb, described in more detail in what a merchant of record actually means.
Either way, "tax on digital goods" is not a checkbox — it's an ongoing obligation that scales with where your customers actually are, and it's worth understanding the shape of it even if someone else is handling the mechanics.