Digital services are booming, especially in the past few years, and governments are looking for ways to tax them adequately, as they can be an important source of tax income. This means that companies that offer digital services are, and will be, increasingly impacted by new rules and regulations regarding their taxation.
Digital businesses need to adapt and deal with this added layer of complexity in order to manage effectively their tax obligations, cash flow, and accounting.
Digital service taxes (DSTs) in context
During the COVID-19 pandemic, many online businesses have seen an increase in business performance, and have been able to not only stay afloat but flourish. State and local governments in the US have been looking into ways to tax goods and services that previously often fell between the cracks.
Digital services, where the provider and the customer are most often located in different US states or even countries, were often not taxed. State and national governments are now looking to change this and are introducing DSTs, which take a few different forms and shapes:
- New sales taxes on digital products and services
- Additional gross revenue taxes
- Adjusting tax rules to feature digital products and services
- Requesting online platforms to provide detailed transactional information, or even to collect taxes at the point of sale
Does the US have a DST system?
At the moment, the US does not have a harmonized DST system; some states have a DST framework in place, while others don’t have one yet.
In fact, in the US, taxes are particularly complex to navigate for online businesses, as there are thousands of state and local tax jurisdictions, and not all states have similar systems for the taxation of digital goods and services.
The state of Maryland has been among the first ones to create a DST legislation framework, adding digital goods to the sales tax base. The application of Maryland’s DST has been challenged in court and the start date has been therefore delayed, but it is expected to come in force soon.
Similarly, more than 15 other states are currently implementing DSTs and are actively looking to address the tax challenges of the digital economy. The fact that Maryland’s tax bill is being challenged is likely going to make it easier for state governments to better prepare for the legal complexities of DSTs, and protect themselves against similar scenarios.
How can businesses address the challenge of DST rules in the States?
Creating a DST system, even within a single state, is a challenging task for governments. Navigating DSTs in the States is, therefore, complicated for both the sellers of digital goods and services and for online marketplaces where such goods are offered.
Due to their complexity, DSTs place an added administrative and fiscal burden on businesses. In some instances, tech companies (for example, SaaS businesses or other software providers) or sellers of other digital goods and services (online courses, workshops, music subscription services, etc.) might be subject to DSTs they haven’t adequately assessed or researched.
Non-compliance might lead to business risks such as fines, added fees, or the failure to adapt their pricing models to DSTs. Nearly always, businesses would need to devote resources (efforts, budget, and time) to navigate DSTs successfully.
For this reason, it’s particularly important to use a solution that helps you address the specific tax challenges for your business, and comply with DST rules in the States.