VAT for dummies: An easy guide for WordPress EDD sellers

If you sell digital products online, then VAT is a topic you should take some time to learn about. To put it simply, VAT is a consumption tax on goods and services in the EU. If you think taxes in the United States are confusing, VAT takes it to a whole new level.

I went down this rabbit hole a couple of years ago, and today I’m going to share everything I’ve learned. A lot of resources that talk about VAT still aren’t very helpful or don’t explain it in an easy way. Not all of us are tax accountants, and sometimes it can be overwhelming. Thankfully, for WordPress developers and sellers, tackling VAT is a lot easier now than it used to be.

Most of the examples below are taken from the point of view of a business registered in the United States, but no matter where you are, I think you’ll find something useful.

Important: I’m not a lawyer, so please consult one if you have any doubts about the information below.

What is VAT?

Value-added tax (VAT) is a consumption tax on the value added to goods and services in the EU. You can think of this as an equivalent to something like sales tax here in the states.

B2C

Any business located in the United States is required to charge VAT for business-to-consumer (B2C) transactions to those in the EU. Yes, you heard that right.

The rate is based on the customer’s country. For example, in France VAT is 20% while in Hungary it’s a whopping 27%. See tax rates by country.

B2B

For business-to-business transactions (B2B), you do what is called a reverse-charge VAT. If the customer’s business is registered in the EU and has a valid VAT number, it is exempt from VAT.

You can think of a VAT number like Employer Identification Numbers (EIN) in the United States. Every registered business in the EU has to have one. VAT numbers, however, are OK to share publically, and a lot of times you need to for legal purposes (like on an invoice or the footer of your website). EIN numbers you generally want to keep to yourself.

A VAT ID will look something this: DE123456789 (example from Germany). When someone purchases a product from you as or for their business, they can enter their VAT number, and they aren’t charged VAT on checkout.

A VAT number has to be valid, of course, for the reverse-charge to work. You can easily look up VAT numbers on the European Commission’s website. This is a real-time system that checks the validity of VAT identification numbers against the databases maintained by member states. Ecommerce solutions like Easy Digital Download have extensions that can do this for you automatically.

Validate VAT number on European Commission website
Validate VAT number on European Commission website

Penalties for not paying VAT

Are there penalties for not paying VAT? Yes and no. Honestly, this is kind of a grey area.

Currently, each individual EU country enforces its own VAT compliance with tax audits. Just like the IRS does. To enforce this in the United States, they would need cooperation from the United States government. The chances of that happening aren’t very likely.

With that being said, here are a couple of reasons why I highly recommend paying VAT:

  • Peace of mind. You never know what might happen. Having to pay back taxes for a small WordPress company could ruin you.
  • People don’t like taxes, but they do help support countries and their economies. If you’re selling your product to a country in the EU, it makes sense to help support them and follow the laws they have in place.
  • You might decide down the road to pick up and move your business to the EU. Paper trails will most likely follow you, and then you’re putting yourself at a big risk of an audit.
I see a lot of WordPress sellers still not collecting VAT and encourage everyone to take the time and learn how it works. 💸Click to Tweet

VAT MOSS registration

The EU consists of 27 member states (countries). You are required to pay VAT to each individual country using its own VAT rate. Before you run in fear, this is why the mini one-stop-shop (MOSS) was created. It simplifies the process. It allows you to submit your VAT payments all at once, and then they handle distribution to each member state for you. Phew!

Each member state basically has its own MOSS. If your business is registered in the United States, you can select any MOSS in the EU. I personally recommend using Revenue, the MOSS from Ireland.

The Ireland MOSS VAT is a popular one for its ease of use, no complications with Brexit, and is the one I’ll be using in the examples below. See the steps to register.

Revenue VAT MOSS
Revenue VAT MOSS

After you register, you will get a confirmation back from Revenue. They are very friendly and surprisingly very fast to reply. They will confirm your account and issue you a VAT ID number. If you are in the United States, it will look something like this: EU123456789

After you have your VAT ID, you will need to create an account on their website to make your payments. To do this, they will issue you a ROS Access Number. This is mailed in a physical letter. If you are using Revenue, the letter comes from Ireland. For me, it took a little over a week to arrive.

Once you have your ROS Access Number, you can use it to create an account on their website, along with a downloadable certificate you have to use to login. Make sure to store this certificate file someplace safe, and preferably somewhere that is backed up.

The entire process of getting a valid VAT ID and getting your account up and running takes about two weeks.

Revenue dashboard
Revenue dashboard

Collecting VAT in Easy Digital Downloads

Before I dive into VAT and Easy Digital Downloads (EDD), it’s important to first mention other alternatives.

Freemius, for example, handles paying VAT for you. Some payment processors like FastSpring and Paddle can also handle VAT for you. The reason I use Easy Digital Downloads is to cut down on sellers’ fees. All of these are great platforms; it’s just a matter of doing what works best for your business. Using EDD might require little extra work than say Freemius, hence the reason for this article.

The good news for WordPress developers and sellers is that there are great solutions for collecting and paying VAT when using Easy Digital Downloads. I was previously using Quaderno (which is fine), but in 2019 the amazing team over at Barn2 Media released their EDD EU VAT plugin.

EU VAT for EDD WordPress plugin
EU VAT for EDD WordPress plugin

Being developers themselves, their team understands exactly what sellers using EDD need! I highly recommend it and it’s what I’ll be using in the examples below.

I also have to give a shout out about their support. It’s great! I emailed them in regards to an issue with the VAT checkout field and the fix was in the next plugin update. 👏

Set up EDD EU VAT plugin

After installing the EDD EU VAT plugin, all you need to do is enable Taxes in EDD (if you haven’t already). The developers keep the plugin up to date with the latest VAT rates for each EU member state. You don’t have to worry about configuring any tax rates.

Enable taxes in Easy Digital Downloads
Enable taxes in Easy Digital Downloads

After enabling taxes, go to the “Extensions” tab in EDD and fill out the information for EU VAT. Make sure to check the option to “Include VAT information on the order details page.”

Ensure you fill out all of your business’ information, including your VAT number, which you should now have.

EDD EU VAT settings
EDD EU VAT settings

The plugin adds the VAT number field on your EDD check out page. This utilizes the “Billing Country” to determine whether or not this should be hidden based on your store’s home country. For example, our store is in the United States, so by default, this field doesn’t show up for people in the United States.

Enter VAT ID on checkout
Enter VAT ID on checkout

Providing a Proper VAT invoice

Part of collecting and complying with VAT is being able to provide a proper invoice. This needs to include details such as your business name, address, sale amount, taxable amount, and VAT ID number.

While the EDD EU VAT plugin adds these details to the order page, it’s not a great solution for clients to download and print something at a later time. Trust me; if you don’t implement an easy solution for VAT invoices, you will get a lot of emails. I’ve been there.

There are two different extensions I recommend for this:

Option 1: EDD Invoices

The EDD Invoices extension provides basic HTML invoices that customers can download and customize anytime from their account.

Option 2: EDD PDF Invoices (recommended)

The PDF Invoices extension provides a nicely formated PDF invoice that customers can download anytime from their account. The reason I recommend this one is because it also has a convenient download link for admins. If someone emails you and wants you to provide them an invoice, there is no easy way to do this with option 1.

EDD download invoice
EDD download invoice

Note: The EDD EU VAT plugin has an integration with both of the above extensions so that all the proper VAT information is added.

Document VAT on your WordPress site

I’m a big stickler for documentation. Don’t forget to add at least one doc on your site about how you collect VAT and what they can do to troubleshoot any VAT ID verification issues. See an example on our Perfmatters’ site. This will save you a few support tickets.

Example of documentating VAT
Example of documentating VAT

How to pay VAT

VAT is collected by you and must be submitted to its respective EU member state’s tax authority. It’s made available through the Revenue Online Service (ROS) at the end of each calendar quarter, and you have to complete your return within 20 days of that date.

For example, the return relating to the calendar quarter January-March must be submitted on or before 20 April of that year.

  • 20 April, for first-quarter ending 31 March
  • 20 July, for second-quarter ending 30 June
  • 20 October, for third-quarter ending 30 September
  • 20 January, for fourth-quarter ending 31 December

This is similar to how estimated taxes work in the United States. However, it’s important to note that the quarterly IRS deadlines don’t always match the VAT deadlines. So make sure to add all eight different dates to your calendar.

Calendar reminder to pay VAT
Calendar reminder to pay VAT

Exporting VAT data from EDD

When it comes time to pay VAT, you will need to export your VAT report from EDD. The EDD EU VAT plugin adds two new reports under “Downloads → Reports.”

If you’re in the United States, you really only care about the main EU VAT report. With this, you can generate all of the sales that have VAT attached to them. Barn2 Plugins also has a good walkthrough.

Export EU VAT Report
Export EU VAT Report

The MOSS VAT return in Ireland must be completed in Euro, irrespective of which currency was applied when making the sale. The EDD EU VAT report, however, doesn’t do the exchange rate for you. In the CSV, you will see the VAT collected as USD. This means you need to convert it to EUR.

USD to EUR exchange rate

According to Revenue, you need to apply the official European Central Bank (ECB) exchange rate applicable on the last day of the calendar quarter. These rates are published online on the ECB’s website and are updated daily.

USD to EUR (ECB)
USD to EUR (ECB)

This makes it a little easier because it means you don’t have to apply the exchange rate for each separate day, just what it is on the last day of the calendar quarter. Phew!

It’s important to note that one US dollar is worth slightly more than one Euro. It hovers between 0.83 to 0.96. This means you don’t need to worry about losing a bunch of money when doing the exchange rate.

USD to Euro

Here is an example of how my Google Sheet is set up to handle the exchange rate from USD to Euros. This is based on an exchange rate of 0.893.

CountryVAT %ValueVATExchange RateValue €VAT €
Country 120%$200.00$40.000.893€178.60€35.72
Country 221%$250.00$52.200.893€223.25€46.61
Total$450.00$92.20€401.85€82.33

All you need to do is multiply the USD VAT amount with the exchange rate to get the € VAT amount. Then add them up. So in the example above, the total VAT owed would be €82.33. In Google Sheets or Excel, you can create a template and use a formula like =SUM(I3*J3) to calculate everything for you automatically. This way, it’s pretty fast each quarter.

Set up a free business Transferwise account

After you have the total amount, the next problem to tackle is how to pay VAT MOSS in the most cost-effective way, without a bunch of foreign transaction or wire transfer fees. A lot of banks in the United States charge between $35-50 for outgoing international wire transfers.

That’s where TransferWise comes to the rescue. If you aren’t familiar with TransferWise, basically it’s a cheap and fast way to send money abroad. I recommend setting up a free business account. This service is actually pretty incredible!

Transferwise
Transferwise

You can transfer your VAT from your US bank account to TransferWise and immediately convert it to EUR. You then do what they call a ROS debit from your TransferWise account to Revenue (Danske bank located in Copenhagen, Denmark).

Submit return for VAT MOSS

After you’ve set up your TransferWise account, you are ready to submit your VAT MOSS return via the Revenue website. I recommend watching this step by step video.

Note: I’ll circle back this next quarter and add a few more screenshots and steps for this section, so it’s as easy as possible to understand.

Sending email conformation to ROS

Once you submit your VAT MOSS return, it’s time to send them a confirmation email that you’ve initiated a ROS debit from your bank account (your TransferWise business bank account). This is something they do require. Below is an example of the email template I use.

Subject: VAT MOSS payment, [business name], EUXXXXXXXXX, 01/04/2020 – 30/06/2020

I just initiated a ROS Debit.

– VAT MOSS payment for [business name], EUXXXXXXXXX
– Quarter: 01/04/2020 – 30/06/2020
– Total amount: €0.00
– Notice number: XXXXXXXXXA

If you need anything else, please let me know.

Thanks,
Brian

Once you email them, it takes a few business days, and you’ll see them deduct the money from your TransferWise account. You can then check your online account to confirm that your VAT has been paid for the quarter.

Overpaying

If you overpay on VAT, you will get refunds deposited back into your bank from the various EU states themselves, not from MOSS.

Additional VAT questions

Are you taxed on VAT as income?

The short answer is no. As long as you record it properly in your bookkeeping software or with your accountant, VAT should not be treated as part of your taxable income. You are simply holding VAT temporarily after collecting it and then submitting it to the EU member state.

What happens with VAT due to Brexit?

This is still unknown at the moment. I recommend using the Ireland VAT MOSS as this won’t be impacted by Brexit for the rest of the EU. However, it very well could be that sellers will have to also submit VAT in the UK separately using its own system.

Summary

See, that wasn’t too hard, was it? 😄 Hopefully, by now, you have a slightly better understanding of how VAT works and how to pay it when selling your WordPress plugins, themes, or any digital product with Easy Digital Downloads.

If you have any questions regarding VAT or EDD, feel free to drop them below. Again, I’m not a lawyer, but I’m always happy to offer my advice.

Make sure to also check out my post on what we’ve learned building and selling WordPress plugins.

Brian Jackson

I craft actionable content and develop performance-driven WordPress plugins. Connect on Twitter or subscribe to my newsletter (twice a month, no spam).

6 thoughts on “VAT for dummies: An easy guide for WordPress EDD sellers”

  1. Hi Brian – thank you so much for writing about our Easy Digital Downloads EU VAT plugin, that was a nice surprise when I saw it in today’s WPLift newsletter!

    Reply
    • Hey Katie!
      You’re welcome. Thank you for developing such a great plugin. It has really helped streamline VAT collection and reporting for our business.

      Reply
  2. Hi,

    First there is a mistake “you will get refunds deposited back into your back” the last “back” should be “bank”.

    I am a bit confused, is this for people selling to EU users? What about LLC owners in the US how will they go about tax returns

    Reply
    • Hey Kingsley,
      Thanks, I’ve fixed the typo.

      Great question. Yes, this is for anyone selling to EU users. I tailored the article for businesses in the US, as our business in the US. Yes, this impacts LLC owners in the United States if you sell digital goods to EU users.

      What you can do for bookkeeping purposes is to record it as a VAT tax payment. This way, you aren’t taxed on the VAT as income in the US (that you are holding each quarter to pay to VAT MOSS). If you’re using Transferwise only for this, an easy way to keep track is to always treat a Transferwise transfer as a VAT tax payment.

      Again, I’m not an accountant, but I have worked with them. Hopefully, that is helpful.

      Reply

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