The digital economy is forcing us to rewrite several rulebooks, and Tax Offices across the world are scrambling to catch internet companies in their net. It used to be that a business could be defined by what it sold: either you were in goods or services. But the Cloud, Blockchain and now the Metaverse have blurred that line. We have digital goods and services that don’t fit nicely into current tax codes, creating confusion.

The great engineer and entrepreneur Tony Fadell uses a great term in his book Build that helps draw a line: either you sell atoms or electrons. Atoms are the building blocks of all physical products – whether it’s a pair of shoes, a chocolate bar or an electric vehicle. Think ‘hardware’, but across all industries.

Electrons are the particles that carry electricity, and Fadell uses them to refer to anything that is transferred exclusively over the internet, with no physical goods involved. Think ‘software’, but with an open mind.

Taxing atoms is relatively simple: most countries define their laws based on either physical goods (known as ‘Tangible Personal Property or TPP in the USA) or services (in the classical sense – as provided by humans made up of atoms). Almost no legislation was written with electrons in mind.

We like to refer to any commercial good that is exclusively sold as electrons as Digital Products. This includes apps, games, streamed content, classical software and software-as-a-service (SaaS). But it also includes Infrastructure and Platform as a service (IaaS, Paas), and live webinars, and crypto coins and even NFT’s. This “Industry of Electrons” is almost infinite – but if citizens pay for your electrons, I guarantee you the tax man will want his piece of the pie.

The simplest way to think about it is if you have customers in a country who pay to consume your digital product – whether that’s by monthly subscription, once-off purchase or on-demand access – the tax office will probably look to tax you.

In the USA, 35 states have clarified their nexus position on Digital Products, so all businesses selling Electrons should understand its sales tax exposure.