Are digital products taxable in New Zealand?

New Zealand has an indirect system known as goods and services tax (GST). Businesses selling digital products to customers in New Zealand may need to comply with New Zealand's GST rules.

The standard GST rate in New Zealand is 15%. Businesses with over NZD 60,000 in annual taxable sales are required to register for GST and charge GST on sales to New Zealand consumers. For business-to-business (B2B) sales, GST is handled via the reverse charge mechanism, where the New Zealand business accounts for the GST. For business-to-consumer (B2C) sales, the nonresident supplier must collect and remit GST at 15% on taxable sales.

Determining if your product is taxable in New Zealand

To determine whether GST applies to the sale of your digital product or service, there are three main factors to consider:

1. Customer's location: You need to identify the location of your customer, as tax regulations vary by country. Common pieces of evidence for customer location determination include billing address, customer account address, and credit card country.
2. Taxability of your product: Your digital product or service needs to qualify as a digital good or service for GST purposes. This typically means that it is delivered electronically over the Internet or an electronic network, is automated, relies on technology, and is not a physical good.
3. Customer’s tax registration status: If you sell to other businesses located in New Zealand, you should collect and validate their tax registration numbers (tax IDs). In New Zealand, sellers are not responsible for GST on B2B transactions with the proper documentation, and the responsibility of accounting for tax is transferred to the buyer through a reverse charge mechanism.

Getting GST compliant in New Zealand

To ensure compliance with GST regulations, here are the general steps that a nonresident company selling software or other digital products should take:

1. Collect customer addresses and tax IDs: Even if you are not registered for GST, collecting customer tax IDs can save you expenses in the future. This step can be taken right away for customers outside the US.
2. Understand your GST obligations: Determine where you have GST obligations by cross-checking customer locations and the product taxability and registration thresholds in each country. Each country has its own registration threshold, which triggers the requirement to register.
3. Monitor GST exposure and register in exposed jurisdictions: If your sales reach the registration threshold in New Zealand, you are required to register for tax purposes. Each country has its own processes for registration.
4. Apply GST where necessary: Identify transactions that require tax collection and apply the correct rates to those invoices. Though New Zealand utilizes the reverse charge mechanism for B2B transactions, you should still validate tax IDs for B2B transactions to confirm the customer’s status, but charge tax if a valid tax ID is not provided.
5. File GST returns, make payments, and keep records: Periodically file tax returns with the jurisdictions in which you sell, reporting the tax collected and remitted. Be prepared for foreign exchange conversions and cross-border payments in various currencies. Many countries also have a legal requirement to keep tax records for a certain period of time.

Risks of delaying compliance

Delaying tax compliance can expose your business to various risks:

• Audits: As tax legislation for digital goods is relatively new, audits for international sellers are increasing. Facing an audit for which you are not prepared can result in fees and penalties that can significantly impact your business.
• Paying out of pocket: Regardless of whether your customers pay tax, you are responsible for the tax on the sales you make. If you are audited or register late, you may have to pay the tax out of pocket, along with penalties and fees.
• Reputational risk: When expanding internationally, your compliance with tax rules may be questioned by potential business partners or customers. Failure to comply with tax regulations can harm your reputation and even lead to blocked business opportunities.

To learn more about tax rules and regulations for nonresident businesses around the world, explore Anrok’s VAT index for digital products.