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Why do I need to select 'taxable categories' for my products?

What are ‘taxable categories’?

‘Taxable categories’ is a feature enabling you to choose designations such as ‘eBook’ and ‘SaaS’ for your products and subscription plans.

With this feature, you will be able to select the right category for your products and enable Paddle to charge the tax rate relevant to the type of product you’re selling. This may mean lowering the price customers pay for your products and improving your conversions. For example, eBooks are often subject to lower tax rates, meaning customers would pay less for your product.

What categories can I select from?

Each product you sell has certain features which place it in a distinct category and make it subject to different tax rates.

Although there are thousands of categories to define different products in different industries, Paddle has five categories for sellers to choose from for their products:

1. Standard Digital Goods

‘Standard Digital Goods’ is usually the correct choice. It’s therefore automatically approved and pre-assigned to all products and plans by default.

This category is for software products that are pre-written and can be downloaded and/or installed onto a local machine. An example of this might be something like Microsoft Excel or an application you download to organize files on your computer. Most will probably be sold with a one-time purchase but can be charged with subscriptions too (so don’t assume subscriptions = SaaS when it comes to tax categorization).

Examples include:

  • Microsoft Excel
  • CleanMyMac
  • Organizational tools on local machines

2. Digital Goods

These are non-customizable digital files or media (so not software, unlike above) acquired with an upfront payment that can be accessed without any physical product being delivered. Examples might be digital artwork or online video tutorials.

Ask yourself:

  • Is the item a digital file that is not software?
  • Is the item available for download?
  • Is the item standard for all users, and not customizable?
  • Is it a one-off purchase?

Examples include:

  • Online video tutorials
  • Digital artwork, posters, or graphics

3. eBooks

This is for digital books and educational material which is sold with permanent rights for use by the customer. eBooks are often subjected to the lowest sales tax rates, and in many cases don’t incur tax at all. Examples are digital books sold through Amazon Kindle.

Ask yourself:

  • Is it a non-editable book or educational text?
  • Is it a one-off purchase?

Examples include:

  • Amazon Kindle products

4. SaaS

The ‘SaaS’ category has specific criteria for taxation, so be careful; you might consider yourself a SaaS company but your subscriptions might not fall into this category!

Software as a Service (SaaS) allows users to connect to and use online or cloud-based applications over the Internet. Common examples are tools such as email, calendaring, and office applications, like spreadsheets and word processors.

SaaS provides a software solution that you purchase on a pay-as-you-go basis from a cloud service provider. You rent the use of an app for your organization, and your users connect to it over the Internet, usually with a web browser.

The key differentiation is that all of the underlying infrastructure, middleware, application software, and application data are located in the service provider’s data center. The service provider manages the hardware and software platforms and, with the appropriate service agreement, will grant the availability and security of the application.

Ask yourself:

  • Does the product need to be used online or require an active internet connection/data transfer to use?
  • Is the application and/or data hosted in the cloud (even if a downloadable product allows the online service/data to be accessed)?
  • Is your product licensed via subscription payments?

Examples include:

  • Spotify
  • Netflix
  • Zoom
  • Framer

5. Web Hosting

A cloud storage service for personal or corporate information, assets, or intellectual property.

Ask yourself:

  • Is the product a website hosting service where you, as the hosting company, do not perform any services to the websites themselves?

Examples include:

  • Hostinger
  • Google Drive
  • AWS

How do I select categories for my products and subscription plans?

Currently, all products and subscription plans are categorized under Standard Digital Goods by default. You will need to adjust this selection if your product falls into a different category, such as SaaS or Web hosting. Once you choose the right category and submit a request, our team will review your site(s) and approve or reject the requested categories for use.

When you create a new product or subscription plan, you will be able to select previously approved categories for use. You can also checkbox-select the products and plans you would like to change the category for and apply approved categories to them in bulk on the ‘Manage’ tab in Catalog > Taxable Categories.

If you believe your product should be categorized under a different category, you can go to Catalog > Taxable Categories and request a new category to be reviewed and approved by our in-house team.

Please be aware that changing the category for a subscription plan will also change it for existing subscriptions, which could result in a price change for customers.

What is the approval process?

You need to take the following steps to request a new category for your products and plans:

  • Go to Catalog > Taxable Categories. The first tab - ‘All’ - is where you can see the categories that are approved for use, and request new categories from those available: SaaS, Digital Goods (such as media files), Web Hosting, and eBooks. Standard Digital Goods (downloadable software) is enabled and applied to all products and plans by default
  • When click the ‘Get approval for new category’ button, you must assign a product or plan that is an example of that category
  • Our team will audit your site before approving the category for use
  • Once your requested category is approved by our team, it will be unlocked for you to apply it to more of your products and plans
  • The ‘Associated Item’ on the ‘All’ tab shows the first product/plan applied to that category and is what our team assessed when approving the category for you. You can use this category for other products/plans from the ‘Manage’ tab
  • Once a category is approved in the ‘All’ tab, click on the ‘Manage’ tab to apply it to more of your products and plans, including in bulk
  • Note that when a category is approved, it will automatically be applied to the product or plan you associated with it when making the initial request
  • If your request is rejected by our team, the tax will remain the same and continue to be calculated as if your products are Standard Digital Goods

Please note that you will not be able to start assigning categories other than Standard Digital Goods to your products before receiving the Paddle team’s approval. Until the new category is approved, your products and subscription plans will continue to be categorized under Standard Digital Goods and subject to the tax rate for this category.

You need to request category adjustments for your products if you believe they should be categorized under a different category. This may reduce the price customers pay for your products, which could also boost your conversion rates.

How does this impact the sales tax charged and my conversion rates?

In addition to calculating the tax based on location and whether a sale is B2C or B2B, Paddle can charge the correct tax rate according to your product type.

In some cases, lower tax means reducing the price of your product which will have a positive impact on your conversion rates. For example, if your products are eBooks and are currently categorized as Standard Digital Goods, selecting the right category will lower the amount customers pay at the checkout as eBooks are often subject to less or no sales tax. However, if you fail to adjust the category, the tax will remain the same and continue to be calculated as if your products are Standard Digital Goods.

As mentioned earlier, changing the category for a subscription plan will also change it for any existing subscribers too, so be aware that their recurring payments may change as a result.

Need more help?

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