Tax on AI data license payments: withholding, VAT and income

Tax is often the last thing sellers think about in a data deal and the first thing the buyer's finance team asks for. Before the first payment, a US buyer will want a tax form from you, and the form decides how much of the fee you actually receive.

This guide explains the usual treatment at a general level, starting with US sellers, then foreign sellers paid by US buyers, then UK and EU VAT. Every point comes from IRS, HMRC, state or European Commission guidance. How a payment is taxed in your case depends on the contract, your entity type and where you are based, so take tax advice before you sign.

How is AI data license income usually taxed in the US?

AI data license income is usually taxed in the US as ordinary income, and it is often treated as a royalty because the buyer pays for the right to use the data. The IRS instructions for Form 1099-MISC describe royalties on intangible property as payments for things "such as patents, copyrights, and trademarks".

Not every data payment is a royalty. An outright sale of all rights, or a fee for collecting, labeling or cleaning data, can be classed differently, and the label in the contract is not decisive. Your accountant will look at what rights pass, for how long and whether you perform services.

The 2025 Instructions for Schedule E list royalties from copyrights, patents and name, image and likeness rights on Part I, and say that people in business as self-employed writers, inventors or artists should "report your royalty income and expenses on Schedule C, not on Schedule E".

What tax forms does a US seller give an AI data buyer?

A US seller usually gives an AI data buyer a completed Form W-9 with its taxpayer identification number. The buyer uses it to decide whether it must file a Form 1099 and to avoid backup withholding.

The IRS backup withholding page lists royalty payments reported on Form 1099-MISC among the payments subject to withholding "at the current rate of 24 percent" when the payee has not given a correct TIN. Returning a signed W-9 before the first invoice avoids that.

If the payment is for services, such as recording or labeling new data for the buyer, it may be reported as nonemployee compensation instead. The Instructions for Forms 1099-MISC and 1099-NEC raised that threshold to $2,000 for tax years beginning after 2025, but the royalty threshold stays at $10.

Do states charge sales tax on data licenses?

Some states charge sales tax on data or information, so a data license can be taxable depending on the state and how the deal is structured. Most states do not tax a license of intangible rights as such, but state definitions of digital goods and information services can catch data delivered electronically.

• Texas: the Comptroller's information services publication says sellers charge tax "on only 80 percent of the amount you bill for your information service", with data retrieval and mailing lists among the taxable examples
• Washington: the Department of Revenue's digital products guidance says data and information transferred electronically are digital goods and taxable, though digital goods bought for business use can be exempt, and some IT and software services became subject to retail sales tax on October 1, 2025

Sales tax normally falls on the buyer, but the seller may have to collect it. Ask your adviser whether your state, and the buyer's state, treat the license as a taxable digital good or information service, and say in the license who bears any sales tax. Our Texas and Washington seller guides cover each state's wider rules.

US tax is generally withheld at 30% from US-source royalties paid to a foreign seller, unless a tax treaty reduces or removes it. Publication 515 states that "Most types of U.S. source income received by a foreign person are subject to U.S. tax of 30%".

Royalties are US-source when the property is used in the US. Section 861(a)(4) of the Internal Revenue Code treats as US-source "Rentals or royalties from property located in the United States", including payments for the use of copyrights and similar intangibles there. A license to a US developer that trains in the US will usually produce US-source income.

The rates come from the IRS tax treaty tables. Table 1 notes that Ireland's 0% rate can rise to 15% where the income is attributable to a permanent establishment in a third state taxed at less than 60% of the normal rate. Which column applies to data depends on how the payment is classed, which is a question for your adviser.

How does a foreign seller claim a treaty rate?

A foreign seller claims a treaty rate by giving the US buyer a valid Form W-8BEN-E, or Form W-8BEN for an individual, before payment. Publication 515 says a withholding agent in most cases "must get the documentation before you make the payment" to apply a reduced rate.

• Treaty claim: the entity certifies its residence and that it meets an applicable limitation on benefits test in the treaty, and names the test
• Fiscally transparent entities: special rules apply, and Publication 515 says the entity should provide a W-8BEN-E in those cases
• Effectively connected income: a seller with a US trade or business uses Form W-8ECI instead
• Reporting: the buyer reports payments subject to chapter 3 withholding on Form 1042-S and files Form 1042

In practice, a UK company licensing data to a US developer usually completes a W-8BEN-E claiming Article 12(1) of the US-UK treaty. If the form is missing or wrong, the buyer may withhold 30% and leave you to reclaim it. Withholding is not only a US issue, so check whether the buyer's own country deducts tax from royalties paid abroad. Our US and UK seller guides cover the other rules for each side.

Is VAT charged on a data license in the UK and EU?

VAT on a data license in the UK and EU depends mainly on where the customer belongs. For a business customer abroad, the seller usually charges no VAT and the customer accounts for it under the reverse charge.

HMRC's VAT Notice 741A says that for business-to-business services "the supply is made where the customer belongs", that services supplied outside the UK are outside the scope of UK VAT, and that section 12 covers transfers and assignments of copyright, patents, licenses, trademarks and similar rights. Keep commercial evidence that the customer is a business.

In the EU, the European Commission's place of taxation guidance says the B2B general rule under Article 44 is that "the place of taxation is the place where the customer is established". The Your Europe page says that for services to a business customer in another EU country "you don't usually need to charge your customers VAT". Licenses delivered through an automated platform can fall under separate rules for electronically supplied services, so check with your adviser.

What should you settle on tax before signing a data license?

Before signing a data license, settle the tax forms, the withholding position and who bears any indirect tax. These terms belong in the license, as our licensing agreement checklist sets out.

1. 1

   Agree how the payment is classed

   Ask your adviser whether the fee is a royalty, a sale price or a service fee, and describe the grant consistently in the contract.

2. 2

   Send the right form early

   US sellers send Form W-9. Foreign sellers send Form W-8BEN-E or W-8BEN with any treaty claim, before the first invoice.

3. 3

   State the withholding position

   Say whether the price is gross or net of withholding and how the buyer will evidence any tax withheld.

4. 4

   Allocate sales tax and VAT

   Say who bears any sales tax or VAT and whether the price includes it.

5. 5

   Keep the records

   Keep the forms, invoices and Forms 1099 or 1042-S with your tax records for the periods in our record retention guide.

Sellers pay nothing to be assessed, and our success fee is agreed in writing before we introduce you to any buyer. If you want to know what your data could earn before you speak to your accountant, request a free data valuation. Our guide to how much your data is worth covers the price side.