Software & digital3 min read
Best LLC for digital products: sales tax, VAT and refunds
Templates, presets and downloads are the lowest-overhead product in existence and the most awkwardly taxed. A file that costs nothing to deliver is still taxable in a substantial number of states, and VAT applies from the first EU sale.
The short answer
A single-member LLC once it is earning. Then decide whether a merchant of record is worth its spread — for a low-price product sold worldwide, it almost always is.
Published
Selling a Notion template, a Lightroom preset pack, a font, an ebook or a set of design files is the same business at different price points. The structure is trivial. The tax treatment is not, and the licence terms are where the value is protected.
The short answer
A single-member LLC once the product is earning consistently — before that, a sole proprietorship costs nothing and does the same job. Because margins are effectively total, model the S-corp election at roughly $80,000 of profit.
Digital goods are taxed inconsistently
There is no national rule. States that tax digital products define them differently, and the distinctions can be surprisingly fine:
- Some states tax digital goods outright — a downloaded file is tangible enough for their purposes.
- Some distinguish permanent download from temporary access, taxing one and not the other.
- Some tax specified categories only — digital books, music and video — leaving other files untaxed.
- Some do not tax digital products at all.
If you sell through your own site, working out which of those applies where you have nexus is your problem. If you sell through a platform that acts as the seller, it is theirs.
VAT applies from the first EU sale
Supplying a digital product to a consumer in the EU or the UK generally attracts VAT where the customer is, with no small-seller threshold protecting a non-established supplier. At roughly a fifth of the price, this is usually a bigger number than any US sales-tax exposure a template business has.
The licence is the product
A file can be copied infinitely at no cost, so what you are actually selling is permission. Say what that permission covers:
| Term | Why it matters |
|---|---|
| Personal versus commercial use | The single most common ambiguity, and the most common source of underpricing. |
| Single user, team or unlimited seats | Decides whether an agency buying once is a customer or a leak. |
| Whether derivatives may be resold | A template resold as part of someone else's product competes with you. |
| Refund policy | Digital goods cannot be returned; say what you will and will not do. |
| Attribution, if any | Free tiers often trade attribution for price. |
Piracy is a fact of this category rather than a solvable problem. Licence tiers priced so that the honest option is easy, and updates that only registered buyers receive, do more than enforcement ever will.
Refunds and chargebacks
A customer who has downloaded a file and requests a refund still has the file. Most sellers refund anyway, because disputing a $29 charge costs more than the sale — but a permissive policy attracts abuse and a restrictive one attracts chargebacks. State the policy clearly at checkout, which is what protects you in a dispute either way.
If you are not a US person
- You may not need a US entity. Most platforms in this category pay sellers worldwide. A US LLC is for payment rails and credibility, not for permission to sell.
- No S-corp election — Section 1361 bars non-resident alien shareholders.
- Form 5472 with a pro-forma Form 1120 annually if you do form one, $25,000 penalty for failure to file.
- A merchant of record is doubly useful when foreign, removing US state registrations and EU VAT in one decision.
When to revisit
| Trigger | What to reconsider |
|---|---|
| Moving from a platform to your own checkout | You have just taken on sales tax and VAT. |
| First business or team buyers | A commercial licence tier priced for them. |
| Net profit approaching $80,000 | Model the S-corp election. |
| Adding a subscription or membership | Recurring-billing rules, and a different taxability question. |
| Selling a bundle with a service | Bundling a taxable item with an exempt one can make the whole thing taxable. |
Passive income, non-passive paperwork
Founders 8 holds the entity, the filings and the deadlines so the admin stays as light as the product.
Build your workspaceFounders 8 does not provide tax advice. Tax residency depends on facts and rules specific to each jurisdiction — review your position with a qualified adviser.