Taxes on digital products (EU)
If you sell digital goods, you might already know about the EU Value-Added Tax (VAT) changes that are in effect starting from January 1, 2015. It’s important for any merchant to understand what this means and how to adjust accordingly — and Ecwid has all the tools for achieving this.
The Value Added Tax, or VAT is a general tax in the European Union assessed on the value added to goods and services.
According to the EU VAT rules on digital goods, a merchant must pay VAT, if customers from EU countries purchase digital goods from their online store. The VAT rate is based on the EU country where the buyer is located regardless of from where store is.
Basically, you are affected by these VAT rules if the following things are true:
- You sell downloadable digital goods or services including eBooks, hosting services, e-courses, recorded training videos, music or audio downloads etc.
- You sell to customers in EU countries (regardless of whether or not you sell from a EU member state).
Here are the requirements for the merchants to comply with the new rules:
- Identify the location of your customer;
- Calculate the correct VAT rates basing on the customer location;
- Save your customer’s location with two pieces of non-conflicting evidence such as a billing address and matching IP address (you’ll need to retain information for 10 years);
- Submit a quarterly VAT return to each EU state your customers come from, or use a MOSS (Mini One Stop Shop), which reports to each EU state on your behalf.
Here’s what you’ll need to do in order to sell digital goods to your customers in EU countries and meet the requirements:
- Register for MOSS and get a VAT ID. As a merchant you can register for the Mini One Stop Shop, or MOSS. If your business is based in an EU country, then you may already have a VAT ID and can easily register for MOSS. If you don’t have a VAT ID and operate your business from outside the EU, you can choose any EU country to be your Member State of identification. Note: UK merchants with a UK VAT ID can register for MOSS through the HMRC.
- Report quarterly. Each quarter, a merchant is required to submit a MOSS VAT return by electronic means, whether or not they have actually supplied e-goods. The MOSS VAT return (and accompanying payment) is required to be submitted within 20 days of the end of the period covered by the return. This document describes the matter in more details: Guide to the VAT Mini One Stop Shop
- Charge VAT on your products. Our European-based merchants already know that Ecwid has supported setup for VAT rates for a long time. However, if you haven’t set up VAT rates before, it can easily be done through the Ecwid admin. Refer to this article in our Help Center for details.
- Collect customer location. Ecwid already has a built-in capability to ask for a customer’s country. All you need to do is to enable billing address form at checkout in your store:
- navigate to Settings > General > Cart > Checkout settings in your Ecwid Control Panel;
- tick the “Ask for billing address during checkout” checkbox.
- Validate customer location by IP. Ecwid by default automatically detects a customer’s IP address. It is saved in the order details and displayed in the Ecwid admin. If a customer’s IP address doesn’t match the billing address entered at checkout, then Ecwid displays a warning message on the order details page to let you know there is an issue. According to the law requirements, in this case you should contact the customer and ask them to reconcile the discrepancy between the two sources of information.
- Store customer location information for 10 years. The information in your Ecwid admin is stored for as long as you want. No action is required from your side.
As a global company, Ecwid understands the challenges the merchants face and aims at providing them with the tools to operate their stores in compliance with the laws around the world.
Am I affected by the new EU VAT rules from January 1, 2015?
In short: you are, if you sell digital goods to European customers.
Can I set up VAT rates in Ecwid to charge VAT appropriately in each European country?
Absolutely. Please see this article for instructions on how to set up VAT rates.
Ecwid stores my customer information. What about data protection required by HMRC?
HMRC requires a data protection to be in place if the seller stores customer information. However, since Ecwid is SaaS and your store data is fully hosted with us, we’re responsible for the data protection and we do take care of this. You can rest assured that we take all necessary measures to protect your customer information. Additionally, Ecwid is PCI-DSS Level 1 Service Provider certified, which is the gold standard for e-commerce solutions worldwide and ensures a high level of security.
I want to restrict sales to Europe. Is that possible?
We do not recommend doing so as Europe is a huge market. It’s better to try to comply with the rules. In the meantime, if you feel strongly about restricting sales to Europe, you can use a workaround via destination zones:
- Mark all your digital products as the ones that require shipping.
- Create a Free shipping method assigned to a destination zone that does not include the EU.
- Enable this shipping method for your digital products (now marked as requiring shipping) and disable it for your other products using product-specific shipping methods.
After you do that, your digital products will be treated as physical items, and customers will be required to enter their shipping address at checkout. In case the address is inside the EU, they won't be able to proceed with checkout in your store and buy digital products.