There is a moment every digital product seller eventually hits. You've set up your product. You've written the description. You've connected a payment method. Sales start coming in. And somewhere in the back of your mind, a question forms that you keep pushing off: do I owe taxes on any of this?

The short answer is yes, probably. And the longer answer involves a concept called Merchant of Record that most creators have never heard of, but that determines whether you personally owe VAT to tax authorities in Germany, France, Hungary, the UK, and a dozen other countries.

Selling digital products and VAT is one of those topics where ignorance is expensive. Let's go through what actually matters.

What Is VAT and Why Does It Apply to Digital Products

VAT stands for Value Added Tax. It is a consumption tax applied at each stage of a product's journey to the end buyer. In most countries, digital products — ebooks, templates, courses, downloadable files — are subject to VAT.

The EU tightened rules on digital product VAT significantly. Any digital product sold to an EU consumer now triggers VAT at the buyer's country's rate, regardless of where the seller is located. Germany charges 19%. France 20%. Hungary 27%. There is no single EU-wide rate — each country sets its own, and they range from 17% (Luxembourg) to 27% (Hungary).

The UK operates its own separate VAT system post-Brexit. Standard rate for digital services: 20%.

What this means in practice: when you sell a $15 ebook to someone in Munich, Germany is owed €2.85 in VAT on that transaction. When you sell to someone in Paris, France is owed 20% of the sale price. None of this is optional and none of it cancels out just because you didn't know about it.

The €10,000 Threshold — Who It Does and Doesn't Apply To

If you are based in the EU, there is a €10,000 annual threshold for cross-border digital sales. Below that, you can apply your home country's VAT rate to all EU customers. Above it, you must charge each buyer's local rate and use the EU's One Stop Shop (OSS) system to file a single return covering all EU countries.

If you are not based in the EU — US, UK, Canada, Australia, anywhere outside — there is no threshold. From your very first sale to an EU customer, EU VAT rules apply. There is no grace period, no minimum. The obligation starts immediately.

The same applies to the UK: non-UK sellers face zero threshold for VAT registration on digital services to UK consumers.

Two separate registration obligations. Two separate filing systems. Two separate sets of rules. For anyone selling globally, the administrative burden of handling this independently is significant.

Merchant of Record — The Concept That Solves This

A Merchant of Record (MoR) is the legal entity that takes on the responsibility of the sale. They are the official seller on paper. When a platform acts as MoR, they handle the tax obligations for you: calculating the correct rate, collecting it at checkout, filing the returns, and remitting the money to the relevant authorities.

This is why Gumroad, Lemon Squeezy, and Paddle exist and why they take a percentage of every sale. Gumroad charges 10% plus $0.50. Lemon Squeezy charges a percentage. Paddle takes a cut. That fee covers more than just payment processing — it covers VAT compliance in 100+ countries. You receive the net amount after fees and taxes. Your tax obligation for that transaction ends there.

If you sell through a MoR platform, the VAT problem is solved. You don't need to register anywhere, file anything, or track buyer locations. The platform does it.

If you sell through a payment processor instead — Stripe, PayPal without a MoR layer, direct bank transfers — you become the Merchant of Record yourself. Every transaction. Every country. Every rate. Your responsibility.

Stripe Is Not a Merchant of Record

This distinction is critical and widely misunderstood.

Stripe is a payment processor. An excellent one, used by millions of businesses worldwide. It handles the mechanics of moving money from a buyer's card to your bank account. It does not handle your tax obligations.

Stripe does offer a product called Stripe Tax, which can calculate the correct VAT at checkout and collect it from buyers. But collecting is not the same as remitting. Stripe Tax does not file your returns. It does not pay the tax authorities. It generates a report — and then you are expected to take that report, register in the appropriate jurisdictions, and file and remit the taxes yourself.

Stripe launched a Merchant of Record service called Stripe Managed Payments in April 2025. If it matures and becomes widely available, it could change this equation. But as of now, it is in limited beta and not equivalent to using a purpose-built MoR platform.

The implication: if you build a payment flow using Stripe payment links directly — as many creators do when building lightweight stores on Substack or their own sites — you have taken on full VAT liability in every country your buyers are located in.

The Substack Angle

Substack processes payments through Stripe. This creates an interesting and often overlooked tax situation for creators with paid subscriptions.

Substack's own documentation states clearly that Substack does not add, collect, or report any taxes for Europe or Australia. The tax responsibility sits entirely with the creator. If you have paid subscribers in the EU or UK and have not set up VAT compliance, you may be accumulating a VAT liability with every subscription renewal.

A rough estimate: 200 paid subscribers at $7/month, with 25% based in the EU or UK, generates roughly $840 in VAT exposure per year. At 500 subscribers with similar international distribution, that climbs to over $2,000 annually. These are taxes that should have been collected from buyers at the time of purchase — and if they weren't, they may still be owed.

This is not a criticism of Substack specifically. Most newsletter platforms that don't act as MoR have the same structural issue. It is something every creator with an international paid audience should understand before they're surprised by it.

If you want a deeper dive on making money on Substack, the tax angle is part of the picture that rarely gets covered.

Payhip — The Middle Ground

Payhip occupies an interesting middle position. For EU and UK sales, Payhip* handles VAT as a reseller — they calculate, collect, and remit EU and UK VAT for you. For sales outside those jurisdictions, the seller retains the responsibility.

If your audience is primarily EU and UK based, Payhip can give you the MoR benefit for those regions without the full Gumroad fee structure. If you have significant sales in the US, Canada, or Australia, you'll still need to think about those separately.

What This Means When Choosing Where to Sell

The question creators usually ask when comparing platforms is: which one takes the smallest cut? That's understandable. But the more useful question is: which one handles the obligations I'm not equipped to handle myself?

For most solo creators selling digital products online, the answer is a full MoR platform. Gumroad's 10% is not cheap. But it covers global VAT compliance in over 100 countries. Lemon Squeezy does the same. Paddle does the same. Compare that to the cost of registering for VAT in EU member states, filing quarterly OSS returns, and remitting to tax authorities across multiple jurisdictions — and the fee starts to look reasonable.

Building on Stripe directly makes sense if you have a tax advisor or accountant handling the compliance side, or if you're confident your buyer base is concentrated in a country where you're already VAT-registered. For everyone else, bypassing the MoR layer is a bet that the tax authorities won't notice. That's not a bet worth making.

The Practical Options

Here's what the actual choice looks like:

Gumroad, Lemon Squeezy, or Paddle: Full MoR coverage. Pay the fee, lose the tax headache. For creators selling internationally without dedicated tax support, this is still the cleanest path. Comparing the three platforms is worth doing — fees, features, and payouts differ.

Stripe with Stripe Tax, properly configured: You collect VAT at checkout automatically, but you still need to register with tax authorities in the relevant jurisdictions and handle the filings yourself. Or hire someone to do it. This makes sense at larger volumes where a tax professional is already part of the operation.

Payhip for EU/UK-focused audiences: Solid choice if your buyer geography is concentrated in Europe. Handles the jurisdictions with the most complex requirements at a lower fee than full MoR platforms.

Stay in your home country only: If you limit sales to customers in your home country and stay below the local VAT registration threshold, the international complexity disappears. A difficult strategy to maintain once you're publishing content online, but technically the simplest tax setup.

The Bottom Line

Selling digital products and VAT compliance are inseparable once you have international buyers. The EU digital services VAT rules have been in place for years. The UK has its own parallel system. Non-EU sellers have no minimum threshold — the obligation applies from the first sale.

Platforms like Gumroad and Lemon Squeezy charge a fee because they are taking on a real legal obligation on your behalf. When you route payments through Stripe directly, you don't eliminate that obligation. You just become personally responsible for it.

For most solo creators and newsletter writers, that's a trade-off that doesn't make financial sense. If you're monetizing a newsletter with digital product sales, make sure you know who is handling the tax on every transaction.

This is general information, not legal or tax advice. VAT rules change and vary by jurisdiction. Consult a qualified tax professional for advice specific to your situation.

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