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Sales Tax for Digital Products in the US

Sales Tax for Digital Products in the US

Sales tax for digital products is a tricky subject in the United States. We get it: you’re all excited about opening your online business and are ready to start selling digital goods to your customers in the US. If only digital taxes weren’t so overwhelmingly complex!

Well, we have gathered our 10 years of tax compliance experience and expertise to create this easy guide to help you cut through the maze.

Today, media goods such as music, video, and books, can be delivered electronically to customers. Digital sales of these goods have greatly increased while sales of similar products in physical form have experienced a sharp decline.

Historically, customers only purchased physical items such as CDs, VHS cassettes, or paper books, that could be weighed, packaged, mailed, carried, or driven. The majority of today’s sales tax law is still based on old and outdated models focused exclusively on sales of physical goods. No one envisioned the possibility of a future where products and services could be delivered online.

Sales tax in the United States

There is no uniform sales tax in the US. It’s up to each individual state whether or not it wants to charge sales tax, and how much. This means that for any sales your business makes in the US, you need to look at sales tax on a state level, i.e. at the tax regulations for each state relevant to you.

The sales tax laws have been updated to include digital goods and services in different ways across the different US states, and the application of these laws has been troublesome for most state and local governments.

Quick Stats:

  • There are 41 states (plus Washington, DC!) that have taxes on digital products.
  • There are 9 states that do not tax digital products.
  • 4 states do not have a retail sales tax at any level; these include: Delaware, Montana, New Hampshire and Oregon.
  • For the states that tax digital products, the tax rate varies from 1% to 7%, depending upon the state and the type of digital goods.

Please note that in the US, you’re only required to collect in states where you have “sales tax nexus.” This occurs when your business has some kind of physical presence in a state, for instance; an office, employees, inventory, affiliates, a drop shipping relationship or selling products at a tradeshow or other event. But there are other types of nexus, too!

In our experience working with online sellers for over a decade, the type of sales tax nexus you are most likely to encounter (aside from wherever you’re physically located) is the economic nexus. This measures the amount of your sales – by revenue volume or total number of transactions – and triggers sales tax liability if your business surpasses certain thresholds in another state.

The best piece of advice we can give you is to track your sales in every state where you’re selling. This way, you’ll know if you are reaching the economic nexus and must register for sales tax. The issue is that tracking sales manually, in multiple states, gets really hard or time consuming – especially if you want to expand your business! One of our customers was doing this by hand, but decided to find a software to do it for her

I’m going to start selling more internationally and across more states so I may end up with a volume where I’m going to end up with nexus somewhere else so it’s time to really do this, not zip tie and duct tape.

Jessa, online coach.

What Are Digital Products?

So which items are considered digital products? With all of the recent technological advances, this is not an easy question to answer.

In general, digital products, or digital goods, are defined as intangible (= non-physical) goods that exist in electronic or digital format. They are delivered to the end customer electronically, such as through email or online download.

Examples include: digital media, downloadable music, internet radio, internet television and streaming media, webinars and online courses, fonts and graphics, digital subscriptions, online ads, internet coupons, electronic tickets, online casino credits, downloadable software and mobile applications and online games.

From a tax perspective, there are 6 types of digital goods:

  • Online data processing services.
  • Downloaded software.
  • Downloaded books, such as eBooks and Kindle.
  • Downloaded music, digital audio files such as iTunes and podcasts.
  • Downloaded movies or digital video, such as Netflix and Amazon Prime.
  • Other downloaded electronic goods.

Definitions by state

Do all US states apply these categories uniformly? No! Hang in there, we’ll break this down for you. There are basically three scenarios:

  • States using their own definition: In addition to the general categories listed above, many states have their own definition of digital goods and services. These include: Arkansas, Connecticut, Georgia, Illinois, Iowa, Kansas, Louisiana, Maine, Michigan, Minnesota, Mississippi, North Carolina, Ohio, Oklahoma, Texas and West Virginia.
  • States not using any definition at all: There are 18 states (Alabama, Arizona, California, Colorado, D.C., Florida, Hawaii, Idaho, Maryland, Massachusetts, Missouri, New Mexico, New York, Pennsylvania, South Carolina, South Dakota, Utah and Virginia) that do not specifically define digital goods.
  • States using a standard definition: The remaining states utilize a standardized definition of digital goods: Indiana, Kentucky, Nebraska, New Jersey, Nevada, North Dakota, Rhode Island, Tennessee, Vermont, Washington, Wisconsin and Wyoming. This definition is called the Streamlined Sales Tax (SST) Definition of Digital Goods; further information about this is available online, e.g. on the Streamlined Sales Tax Governing Board's website.

Sales tax on digital goods by state

Note that in this article we are referring to digital products such as downloadable software, online courses, e-books and subscriptions, among others. We recommend that you always consult with a professional advisor to find out if your product falls into this category.

This is the list of states in which you currently have to charge taxes if you sell digital products:

Alabama

Digital products are taxable in Alabama. They are generally treated as tangible personal property and subject to taxation at the same rate as other tangible personal property. Learn more about sales tax in Alabama.

Alaska

Unlike other US states, Alaska does not have a state-level sales tax. Instead, local jurisdictions are allowed to decide if they want to levy a sales tax on digital products. Learn more about sales tax in Alaska.

Arizona

Digital products are taxable in Arizona and are considered tangible personal property subject to gross receipts tax, which is Arizona’s equivalent of sales tax. Learn more about sales tax in Arizona.

Arkansas

Digital products are taxable in Arkansas. Learn more about sales tax in Arkansas.

California

Digital products are tax exempt in California, including electronic data products like software, digital books (eBooks), mobile applications, and digital images. However, if accompanied by a physical copy or storage medium, the sale becomes taxable. Learn more about sales tax in California.

Colorado

Digital products are taxable in Colorado as they are considered tangible personal property. Exceptions may apply for certain electronic deliveries of legal publications. Learn more about sales tax in Colorado.

Connecticut

Sales of digital goods in Connecticut, including audio works, visual works, reading materials, or ringtones, are subject to sales and use taxes at the standard rate of 6.35%. Learn more about sales tax in Connecticut.

Florida

Digital products are tax exempt in Florida, as they are not considered tangible personal property. However, if sold alongside tangible personal property, the entire sale may be subject to Florida sales tax. Learn more about sales tax in Florida.

Georgia

As of January 1, 2024, specified digital products sold to end-users in Georgia are taxable if the end user has permanent use of the products and the transaction isn't conditioned upon continued payment. Learn more about sales tax in Georgia.

Hawaii

Digital products are taxable in Hawaii and are subject to the general excise tax, like most transactions in the state. Learn more about sales tax in Hawaii.

Idaho

Digital products in Idaho are taxable when the purchaser has the permanent right to use them, but exempt when leased or rented. Subscriptions follow a similar tax logic. Learn more about sales tax in Idaho.

Illinois

Digital products are tax exempt in Illinois as they are not considered the transfer of tangible personal property but rather intangibles. Learn more about sales tax in Illinois.

Indiana

Digital products are taxable in Indiana, which includes audio works, audiovisual works, and books. Learn more about sales tax in Indiana.

Iowa

As of 2019, digital goods are taxable in Iowa at a rate of 6%. Learn more about sales tax in Iowa.

Kansas

Electronically downloaded or digitized products are information and are tax exempt in Kansas. Learn more about sales tax in Kansas.

Kentucky

Digital products are taxable in Kentucky as they are considered tangible personal property. Learn more about sales tax in Kentucky.

Louisiana

Digital products are taxable in Louisiana. Learn more about sales tax in Louisiana.

Maine

Digital products are taxable in Maine if the nondigital physical form would be subject to sales tax. Learn more about sales tax in Maine.

Maryland

Most digital goods are taxable in Maryland. Learn more about sales tax in Maryland.

Massachusetts

Digital products are tax exempt in Massachusetts, including music, video, reading materials, and ringtones. Learn more about sales tax in Massachusetts.

Michigan

Digital products are tax exempt in Michigan. Learn more about sales tax in Michigan.

Minnesota

Digital products are taxable in Minnesota, except for students' digital textbooks and instructional materials. Learn more about sales tax in Minnesota.

Mississippi

Digital products are taxable in Mississippi, except for school textbooks. Learn more about sales tax in Mississippi.

Missouri

Digital products are tax exempt in Missouri. Learn more about sales tax in Missouri.

Nebraska

Digital products are taxable in Nebraska, including digital music, movies, TV shows, and books. Learn more about sales tax in Nebraska.

Nevada

Digital products are tax exempt in Nevada, including audiovisual works, whether sold permanently or temporarily. Learn more about sales tax in Nevada.

New Jersey

Digital products are taxable in New Jersey, including digital audio-visual works, audio works, and books. Streaming services, however, are non-taxable. Learn more about sales tax in New Jersey.

New Mexico

Digital products are taxable in New Mexico under the state's gross receipts tax. Learn more about sales tax in New Mexico.

New York

Digital products are tax exempt in New York, including music, ringtones, movies, and books. Learn more about sales tax in New York.

North Carolina

Digital products are taxable in North Carolina, including various digital works and publications delivered electronically. Learn more about sales tax in North Carolina.

North Dakota

Digital products are tax exempt in North Dakota, including specified digital products transferred electronically. Learn more about sales tax in North Dakota.

Ohio

Some digital products are taxable in Ohio, including digital audiovisual work, digital audio work, and digital books. Learn more about sales tax in Ohio.

Oklahoma

Digital products are tax exempt in Oklahoma, including digital music, movies, ringtones, and books. Learn more about sales tax in Oklahoma.

Pennsylvania

Photos, books, games, and other downloads are taxable in Pennsylvania. Learn more about sales tax in Pennsylvania.

Rhode Island

Digital goods are taxable in Rhode Island, including specified digital products starting October 1, 2019. Learn more about sales tax in Rhode Island.

South Carolina

Digital products are not taxable in South Carolina as they are not specifically included in the definition of tangible personal property. Learn more about sales tax in South Carolina.

South Dakota

Digital products are taxable in South Dakota, whether transferred electronically for temporary or permanent use. Learn more about sales tax in South Dakota.

Tennessee

Digital products are taxable in Tennessee, including digital audiovisual works, audio works, and books. Learn more about sales tax in Tennessee.

Texas

Digital products are taxable in Texas, similar to tangible personal property sold in physical format. Learn more about sales tax in Texas.

Utah

Digital products are taxable in Utah, considered the same as tangible personal property if the physical form is also taxable. Learn more about sales tax in Utah.

Vermont

Digital products are taxable in Vermont, whether transferred electronically for permanent or temporary use. Learn more about sales tax in Vermont.

Virginia

Digital products are tax exempt in Virginia, including software, downloaded music, ringtones, and reading materials. Learn more about sales tax in Virginia.

Washington

Digital products are taxable in Washington state, including various digital goods regardless of how they are accessed. Learn more about sales tax in Washington.

Washington, DC

Digital goods in Washington D.C. became taxable as of January 1, 2019. Learn more about sales tax in the District of Columbia.

West Virginia

Digital products are tax exempt in West Virginia, including audio works, audiovisual works, and books. Learn more about sales tax in West Virginia.

Wisconsin

Digital goods are taxable in Wisconsin, including audio works, audiovisual works, books, and codes used to purchase works. Learn more about sales tax in Wisconsin.

Wyoming

Digital products are taxable in Wyoming, including digital audio works, audiovisual works, and books. Learn more about sales tax in Wyoming.

Federal and State Legislation

Not the easiest system to understand, right? Many people think so, too, and there have been attempts by the federal and state governments to make this easier for everyone.

In 2011, the US Congress enacted The Digital Goods and Services Tax Fairness Act. This law provided a federal framework for internet taxes, but didn’t go far enough in providing guidance and direction for the individual states.

More recently, there have been several attempts by federal and state legislators to create a more homogenous digital tax, but there has been fierce resistance. This means that so far, the system has remained pretty complex.

Sales Tax for Digital Products: More info

Since you will need to deal with this state-based structure for the foreseeable future, it is important to know where you can get more information about the specific tax rules in each state.

Your most important source is each state’s tax authority or Department of Revenue, but there are numerous other resources that can be used to determine if a digital tax applies to you. For instance, check out our Business Sales Tax Guides!

The Streamlined Sales and Use Tax Agreement (SSUTA) assists states as they administer a similar and more uniform sales and use tax. Their website provides a useful online taxability matrix broken down by each state.

The Federation of Tax Administrators (FTA) is an organization of state tax authorities and administrators which surveys sales tax rates and provides regularly updated reports. If you have additional questions, check with a sales tax specialist or a Certified Public Accountant (CPA).

What’s next?

And voilà! Now you have an understanding of the foundations of sales tax laws in the United States, and you also know how and where to find further information.

One more step you could take? Let Quaderno calculate the tax on your sales AND track your tax liability across all 50 states – automatically! Sign up for a free trial of Quaderno and see how our tax compliance software can give you peace of mind.

Note: At Quaderno we love providing helpful information and best practices about taxes, but we are not certified tax advisors. For further help, or if you are ever in doubt, please consult a professional tax advisor or the Tax Agency.