Financial Implications of the Digital Economy
Hello All,
I would like to preface this by saying that as I was going down the rabbit hole of the digital economy, I realized that the term has almost become synonymous with business. The number of business that do not participate in some kind of online activity (whether it is your entire business or some part of it) is increasingly shrinking:
According to Statistics Canada, in 2020,
Over 85% of Canadian households had internet access, and over 94% of Canadians aged 18 to 34 years old had internet access.
Almost 80% of Canadian households shopped online in 2020.
Nearly 8 in 10 small and medium-sized enterprises in Canada had a website in 2020.
In 2020, the digital economy contributed to 3.9% of Canada's GDP, and the number of jobs in the digital economy is growing faster than overall employment.
(It should be noted that these numbers do not take into account the full effects of the pandemic which, as we all know, significantly accelerated the size and reach of the digital economy.)
So, basically anyone with an internet connection, a computer or smart phone and some time on their hands can start a business. You can be a content creator, an Uber driver, sell your stuff on Ebay or Etsy, offer coaching services or one of the numerous other types of businesses that operate in the digital era. As a consumer, it is possible that you can have all your needs and wants met without ever having to leave your house (agoraphobics have never had it easier)
While the use of technology is pervasive and continues to accelerate and broaden its scope, the financial and tax mechanisms by which we keep on top of it are being outpaced. One of the more common questions I hear from clients is how to integrate their online activity into their accounting and ensure that they are accurately reflecting the tax implications. In the past you generally recorded sales via a cash register or through invoicing your customers which could then be systematically recorded in your accounting system. Now, you might have multiple streams of income that come through various processors, net of fees which are sold to customers in various jurisdictions and or countries. Each of these places might have different tax laws that you are expected to be aware of, or risk penalties. While, numerous tools are available to help you import and analyze your data (and reduce tedious data entry) it requires a bit more skill in understanding what type of information will be most meaningful. You might also have a false sense of security that these tools (which are in and of themselves part of the digital economy) are doing it correctly, but in fact might be creating a bigger mess.
Governments are furiously trying to keep on the different ways in which the digital economy manifest in the economy, and tax them. While income tax is (slightly) more straightforward in that it essentially total sales/revenues (regardless of source) less business related expenses, consumption tax is becoming increasingly complex. The issues with Consumption tax (eg. GST/HST and QST in Canada) relate to the jurisdiction of residence and what goods and/or services on which it applies. There is more uniformity on this Canada as it is largely federally regulated, but in the US there are more than 12,000 sales state and local tax jurisdictions with arcane rules that can be a nightmare for businesses. In Canada, the most recent challenge has been around non Canadian businesses operating in the digital space such as Netflix, Google, Facebook which have only recently been brought under the net.
So while the digital economy has vastly increased opportunities for anyone wanting to start or expand their business, it is important that any new or growing business owner contemplate the financial, accounting and tax implications of being part of the digital economy (or at least have access to expertise that can help).
