When you sell software or digital downloads online, the biggest legal landmine you face isn’t entity formation or copyright infringement.
It is indirect tax compliance: state sales tax in the US, VAT in the European Union and UK, and GST across Canada, Australia, and Asia.
Many solo founders assume that because they work alone from a bedroom office, they only have to worry about local income taxes where they reside.
That assumption is dangerously wrong. In the post-South Dakota v. Wayfair era, the location of your customer—not the location of your desk—determines your tax liability.
Here is an honest, practical breakdown of how economic nexus works and how to protect yourself without spending $5,000 on tax accountants.
Understanding “Economic Nexus”
Historically, a business only had to collect sales tax in states where it maintained a physical presence (an office, warehouse, or employee)—known as physical nexus.
In 2018, the US Supreme Court ruled that states can enforce tax collection based on economic activity alone (economic nexus).
If your digital sales into a specific state cross certain thresholds—typically $100,000 in gross revenue or 200 separate transactions in a calendar year—you are legally required to:
- Register with that state’s department of revenue.
- Calculate and collect the exact local and state sales tax on every transaction.
- File quarterly or monthly tax returns and remit the funds.
Notice that transaction threshold: 200 transactions.
If you sell a $15 Notion template or a $9 WordPress plugin, you could cross the 200-transaction threshold in a state like Illinois or Georgia with just $1,800 in total revenue. Crossing that threshold triggers mandatory state registration and ongoing filing overhead.
The International Nightmare: EU VAT
If you think US state sales tax is complex, European Value-Added Tax (VAT) is even more unforgiving.
Unlike the US, the European Union has zero minimum threshold for non-EU digital businesses. The moment you sell a single €10 digital guide or software license to a consumer in Germany, France, or Spain, you are technically obligated to collect and remit EU VAT.
To comply independently, you must:
- Collect two pieces of non-contradictory evidence proving the customer’s location (IP address, billing address, bank country).
- Apply the specific VAT rate of the customer’s member state (ranging from 17% in Luxembourg to 27% in Hungary).
- Register for the EU VAT One-Stop Shop (OSS) portal.
- Submit quarterly VAT filings in Euros.
For an enterprise with a legal department, this is routine. For a solo developer trying to build a $3,000/month micro-SaaS, managing 27 European tax jurisdictions independently is a bureaucratic suicide mission.
The Two Paths to Compliance
As a solo operator, you have two distinct operational paths:
Path A: The Direct Payment Gateway (Stripe + Stripe Tax)
With this setup, you use standard Stripe. Stripe Tax can calculate the appropriate rate at checkout and warn you when you approach economic nexus thresholds.
The Catch: Stripe Tax only calculates the tax; it does not remit it. You are still the legal merchant. You still have to register with every state and country, prepare the returns, and remit the checks. If you fail to file, you bear full legal liability.
Path B: The Merchant of Record (Paddle / Lemon Squeezy)
Under the Merchant of Record (MoR) model, the platform legally buys the digital product from you at the moment of purchase and resells it to the end customer.
Because the MoR is the legal seller on the invoice:
- They are responsible for calculating, collecting, and remitting sales tax and VAT globally.
- They file the tax returns in all 50 US states, Europe, and the UK.
- They absorb the audit liability if tax rates change.
- You receive a single consolidated payout (net of fees and tax) as a simple B2B royalty, accompanied by a single 1099 or tax invoice.
My Recommendation for Solo Founders
If you earn less than $20,000 a month and sell digital goods or software globally, use a Merchant of Record.
Yes, Paddle or Lemon Squeezy takes approximately 5% + $0.50 per transaction compared to Stripe’s 2.9% + $0.30.
That 2% fee difference feels noticeable on a spreadsheet. But consider the alternative: hiring an outsourced CPA to manage multi-state and international sales tax filings costs between $3,000 and $8,000 annually.
Until your revenue is high enough that the fee difference dwarfs the cost of an accounting firm, paying a Merchant of Record to handle global tax compliance is the cheapest insurance policy you will ever buy.
Related Operational Guides
For deeper frameworks and complementary operational workflows, see: