Digital product taxes

Digital goods are downloadable files or some other kind of electronically supplied product. Consumers living in the European Union (EU) must pay a value added tax (VAT) on digital goods at the rate that applies in their own country, regardless where the seller is located.

But in some jurisdictions, you don't need to charge sales tax on digital products. Check with a local tax expert to make sure you know the requirements in your region.

Exempt a digital product from tax

If you have just a few digital products that are exempt from tax, you can prevent taxes from applying to these individual products. Digital products don't require shipping in a traditional sense, so you can turn off the shipping feature at the same time.

Steps:

  1. Open the product.

  2. In the Pricing section, uncheck Charge taxes on this product.

  3. In the Shipping section, uncheck This is a physical product.

  4. Click Save.

Exempt a large number of digital products by doing a bulk update

If you need to exempt a large number of digital products at once, you can do a bulk update. To do this procedure, you need to be comfortable editing .csv files.

Steps:

  1. Export the products that need to be updated as a .csv file, then edit the values in the following columns:

    Fields to edit in Product CSV
    CSV field Setting
    Variant Requires Shipping Set this value to false.
    Variant Taxable Set this value to false.
    Variant Grams Set this value to 0.
  2. When you've finished editing your .csv file, import it to your store. Be sure to check the option Replace any current products that have the same handle.

Digital goods in the European Union

Digital goods in the EU are defined in legislation as broadcasting, telecommunications, and services that are electronically supplied instead of shipped. Gift cards sent online are not included in the definition.

You can read the rules for VAT on digital services in the EU. Consult with a tax expert so that you know how the EU VAT rules apply to you.

VAT based on the customer location

If you're selling digital goods to customers in the EU, then you need to charge VAT based on your customers' location.

For example, if you're a Dutch merchant and you sell a digital product to a customer in Germany, then you have to charge the customer the German VAT rate of 19%. You can enable the EU Digital VAT Rates feature to make this process easier.

VAT registration

You can register for VAT in one of the following ways:

  • Register for VAT in every EU country where you do business.
  • Register for Mini One-Stop-Shop (MOSS) in the EU country where you live. Your local tax authority (for example, HM Revenue & Customs in the United Kingdom) can provide you with more details on how to register for MOSS.

Evidence of a buyer's location

If you sell digital goods, then some tax authorities require that you collect and record two pieces of evidence of a buyer's location. For every order, Shopify provides you with the billing address and the customer's IP address. The billing address appears on the order page. You can verify the IP address by clicking View Full Analysis in the Fraud Analysis section.

If an IP address appears to come from a different country than the billing address, then you should get another piece of evidence of their location. Check with a tax expert to make sure you have enough evidence for the tax authorities.

Enable VAT rates for digital goods

To simplify charging VAT on your digital goods, you can automatically assign VAT rates for each EU country.

If you enable VAT rates for digital goods, then a collection is created, and whenever you sell a product that is in the collection, the correct VAT rate is automatically applied based on the customer's billing address.

Enabling VAT rates creates a manual product collection with automatically-assigned VAT settings for each EU country. The default collection is called Digital Goods VAT Tax, but you can change this to use any of your manual collections. For more information, refer to Apply digital VAT rates to a different collection

Steps:

  1. In the Tax calculations section, click Charge VAT on digital goods.
  2. Click Save.
  3. On your Collections page, click Digital Goods VAT Tax.
  4. In the Products section, search for products or click Browse, and then add your digital products to the collection.
  5. After you add your digital products, click Save.

Apply digital VAT rates to a different collection

After you create the initial Digital Goods VAT Tax collection, you can apply the rates to another collection of digital goods.

Steps:

  1. From your Shopify admin, click Settings > Taxes.
  2. In the Tax calculations section, click change collection.
  3. Search for the collection that you want to use, or choose the collection from the list.
  4. Click Save.

See the VAT rates you're using

If you've enabled Digital Goods VAT Rates, then you can see the VAT settings that are applied to each country in your shipping list.

Before you view your rates, make sure that each country is in your Shipping zone list.

Steps:

  1. In the Tax regions section, click Set up or Edit beside the name of a European country. The digital goods VAT is shown in the Tax overrides section.

Disable the VAT rates for digital goods

If you disable the EU Digital VAT Rates feature and then re-enable it, you have to reassign your preferred collection if you didn't use the default.

Steps:

  1. In the Tax calculations section, uncheck Charge VAT on digital goods.

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