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 any taxes from applying to these individual products. Because digital products don't require shipping in a traditional sense, you turn off the shipping feature at the same time.

To exempt a digital product from tax:

  1. Open the product.

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

  3. In the Shipping section, uncheck This product requires shipping.

  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.

To exempt digital products by doing a bulk update:

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

    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 Overwrite existing 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.

For example, according to the United Kingdom HM Revenue & Customs, the following items are digital goods:

  • PDF documents automatically e-mailed to customers
  • stock photographs available for automatic download
  • online courses with downloadable videos (but not live webinars)
  • downloadable software
  • electronic/online media such as music, video, and eBooks
  • VoIP credits

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

Grow your business

Sufio can help you set up your store to follow EU VAT regulations, including everything from capturing and validating your business customers' EU VAT registration numbers and setting them as tax exempt when applicable, to creating invoices that are fully compliant in Canada and the countries of the European Union. Sufio offers an exclusive plan for Shopify stores. Business customers with valid VAT numbers are not charged VAT during checkout.

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' locations.

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 will provide you with the billing address and the customer's IP address.

If an IP address appears to come from a different country, then you should get another piece of evidence, such as the address of the customer's credit card provider. Check with a tax expert to make sure you have enough evidence for the tax authorities.

Enable the 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.

  1. In the Tax settings section, click Enable:

    Enable eu vat button

  2. In the dialog box, click Enable EU Digital Goods VAT Taxes:

    Enable digital vat

    This creates a manual product collection with automatically-assigned VAT settings for each EU country. The collection is called Digital Goods VAT Tax (although you can use any of your collections).

  3. Under the Charge EU Digital Goods VAT Taxes checkbox, click Digital Goods VAT Tax, or open the collection from your Collections page):

    Digital goods collection

  4. In the Products section, click Add Products, and then choose your digital products from the drop-down menu:

    Add digital products

  5. After you've added your digital products, click Save.

Apply the digital goods 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.

  1. Click Settings, and then click Taxes.

  2. In the Tax Settings section, below the Charge EU Digital Goods VAT Taxes checkbox, click Choose an alternate collection:

    Eu digital goods vat enabled

  3. Choose the collection that you want to use for the digital goods you sell in the EU:

    Choose digital goods collection

  4. Click Save Collection.

See the VAT rates you're using

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

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

To view the digital goods VAT rates for a country:

  1. In the Tax rates section, click the name of a European country. The digital goods VAT tax is shown in the Tax overrides section:

    Croatia vat

Disable the VAT rates for digital goods

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

To disable the EU Digital VAT Rates feature:

  1. In the Tax Settings section, uncheck Charge EU Digital Goods VAT Taxes:

    Disable digital vat

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