Digital goods marketplaces have real compliance challenges

Sales tax on digital goods tends to be even less straightforward than it is on physical goods. For example:

• Some places, like Texas and Washington (both state and D.C.), tax digital products

• Some states, like California and Nevada, do not tax digital goods

• Still others, like New York and Illinois, tax some digital wares, but not others

The how and why of taxation, as well as the rates applied are not only determined by each of the 12,000+ sales and tax jurisdictions across the United States, but the laws and regulations can also change at any time.

When you’re calculating sales tax on digital products in multiple states, it’s important to know and apply the correct rate for both the location and the product. Not doing so can create headaches and financial penalties come audit time.

Researching the latest rates and rules is both time-consuming and prone to error. Automating sales tax calculation on digital goods can help you improve accuracy and compliance.

Another troublesome area of compliance for digital goods marketplaces can be exemption certificate management. Particularly if your platform sells things like educational materials for schools or software for nonprofits.

For each exempt purchase, a corresponding certificate to justify the exemption is required. Each customer must provide a certificate, which you must then validate, store, and be able to access or update when needed.

States have their own rules about which products require exemption forms, which forms are valid, and how long before a certificate expires. Member states accept the Streamlined Sales Tax form, and several states have multistate agreements to accept each other’s forms. But it’s important to verify that the form you receive is accepted by the jurisdiction in which the sale occurs.

Because of all the variations in forms and rules, managing a slew of paper returns can be onerous for most businesses; doing so for digital products is an especially ironic form of tedium. Using a digital exemption management system can help you create a more efficient process for collecting, storing, and accessing certificates.

Catering to buyers across the U.S. generally equates to higher sales and more market share, but it also means you likely have sales tax obligations in multiple states. As with tax rates and exemptions, each state handles filing and remitting in its own way.

It’s up to each state to determine the frequency of filing — usually monthly, quarterly, or annually, depending on sales volume. Each jurisdiction also establishes filing deadlines, processes, forms, and penalties for late submissions. 

One thing states all have in common: Even if all your sales are tax exempt or you don’t have sales for a given tax period, if you’re registered with a state, you’re required to file a sales tax return.

If you’re only on the hook to file in a few states, filing may be manageable for a small team. But the very nature of marketplace selling typically means nexus is established in several (if not all) states. Using sales tax returns software can help you file properly and on time in each jurisdiction where you’re required to file.

Avalara has a tax compliance solution designed for marketplace facilitators. With extensive sales tax expertise in both ecommerce and digital products, we can help your platform stay compliant with more accuracy and less effort. 

From calculating rates and knowing where you have nexus to managing documents and filing on time, our solution can make sales tax compliance easier to manage, so you can spend more time focused on growing your business.

To find out if Avalara is right for your digital goods marketplace, schedule a call today.