Digital Services in the U.S.: Everything You Should Know

The United States has established itself as one of the most important economic powers of the world, not only because of its wealth, which, according to the World Bank, by 2020, its GDP increased to 20.95 trillion dollars, but also because of the influence that the giant American has in the economies of the whole world, especially in Latin America, and with greater incidence among the marketers industry.

The main sectors that start a business in the US are those with commercial activity related to software development, companies that provide digital marketing services, website development, real estate and E-Commerce (Marketplaces such as Amazon and Shopify) , among others. One of the main reasons is because of the benefits that the American country provides to some of these sectors, such as the exemption from paying the Sale Tax.

It should be clarified that this has been changing, since the pandemic put digital service providers around the world in the spotlight, though this situation had been becoming widespread since 2015: no government wants to lose its piece of the pie in a world where digital services have experienced a vertiginous ascent. Australia, for example, from July 1, 2017, introduced its digital tax law which, for now, will only affect foreign digital companies that provide B2C electronic services. These companies- the law dictates - will have to apply 10% of the Goods and Services Tax (GST).

Similarly, the Canadian government has a 5% Goods and Services Tax (GST) that is levied on most sales. Some provinces charge an Additional Provincial Sales Tax (PST), for example 5% in Alberta, British Columbia and Quebec; 13% in Ontario; and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island. Taking into consideration that it varies depending on the service offered.

It is important to understand that the Sale Tax is, the equivalent of a hybrid between the ICA and the VAT in Colombia, or the IGV (General Sales Tax) in Peru, or Tax on Value Added (VAT) in Uruguay, a tax that is charged to the final consumer in the United States. It is important to clarify that this tax is determined by state, different from the Income Tax, which is federal.

In the US it is not a flat rate, but varies by state, for example, in California it is 7.25%, which is the highest in the country; Connecticut 6.35%; Minnesota 6.87%; Virginia 5.3%; and so on. However, five states are exempt from paying this tax: Oregon, New Hampshire, Montana, Delaware, and Alaska.

United States and the digital services.

The United States is experiencing a general change in tax policy regarding digital products and online businesses, among other things. The American country is at the forefront, which is why today 31 states tax digital products. The remaining 20 do not, or are in the process of being implemented. In the following link you can find an updated list with the states that do and do not tax these services: list of digital goods taxed in the USA.

It is important to say that the declaration and payment of sales tax will depend on the state where said sales are made: in the US there is the principle of territoriality, that is, if a company is incorporated in Oregon, and the recurrence of the sales, whether digital or not, -and if applicable, depending on the state-, are made in California, Sale Tax will be paid depending on where the sale of that product is made. States generally require that payment. This is also determined by the physical location of the merchandise, that is, where the product is shipped from.

‍Florida is one of the most attractive states to establish companies that provide Marketing services, among other things, due to the demand offered by the peninsular state. It is no secret to anyone that Florida is a benchmark in the world of technology. In addition to this, the sale of electronic data products such as software, data, digital books (eBooks), mobile applications and digital images is generally not subject to taxes, but it is worth clarifying that if the sale provides some type of physical copy or media of physical storage, this will be subject to taxes.

Something similar happens in Georgia, where digital products are exempt from taxes. Computer software sold in intangible form is not subject to tax.

Otherwise, Massachusetts, where, for example, there is a law that establishes a tax for online advertising of 6.25% on the gross income of digital advertising services.

For American states that tax digital products, the tax rate varies from 1% to 7%, depending on the state and the type of digital goods sold, a short value compared to Latin American countries.

In the case of Colombia, for example, VAT of 19% is applied to digital services; In Argentina, Law 27430 established the collection of VAT of 21% for foreign companies that provide digital services in the country; In Chile, on June 1, 2020, the Value Added Digital Services Tax (VAT) of 19% was enacted and entered into force; In Mexico, for example, the crisis caused by COVID - 19, led to an increase in eCommerce growth of more than 81% during 2020, which led to the Mexican Electronic Commerce Standard and the entry into force of the Digital Tax 16%; Ecuador of 12%; Paraguay of 10% and Uruguay of 22%.

Reaching the most dynamic market in the world, with more than 330 million people, is possible for any Latin American; commercial alliances and the protection of personal assets of each member or partner are just another of the great advantages that can be experienced, not only by Latin American marketers, but by the business community in general.