Sales tax on digital goods by state

When did you last buy a Blu-ray disc, a CD, or even a hard copy of a book? More and more products that used to be “tangible personal property” are now being consumed in digital form, which has created some confusion about how to charge sales tax on these goods.

Each state makes its own sales tax laws. This means that one state may classify e-books as taxable while another state might not. This article will explore sales tax on digital goods by state and everything you need to know about where they stand now.

What are digital goods and services?

While every US state makes its own rules when taxing digital products, most define “digital goods” as items that are accessed electronically and stored permanently on a person’s computer or other digital device. Items commonly referred to as “digital goods” include:

• Digital books or e-books
• Music downloads
• Movie downloads
• Video game downloads
• Cell phone ringtones

State laws regarding digital goods and services can be challenging to understand, as most sales tax laws were created before digital products existed. Almost all states with sales tax apply it to “tangible personal property” — but e-books, movies, and music are not things you can physically hold like a DVD.

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Some states use existing guidelines to determine sales tax on the sale of digital products or tax them as tangible personal property because they can be seen or experienced. Others don’t charge sales tax on digital goods because they are intangible.

Sales tax on digital goods example

For example, many states tax digital products depending on how they are accessed. For example, a digital product might be taxed differently if it’s:

• Accessed online but not stored on your computer (example: movies, TV shows, music and other audiovisuals that you stream online)
• Accessed online and potentially downloaded, but that are no longer accessible if you stop paying a subscription fee
• Accessed online but only kept temporarily, such as a movie rented for three days through a video-on-demand service like Amazon Prime Video

Let’s look at two opposing digital goods taxability examples:

California – Digital goods are generally not subject to sales tax

California has ruled that digital goods such as e-books, movies, and songs transmitted over the internet are taxable. This is as long as you don’t also receive a tangible item, like a print copy of an e-book, along with the purchase.  Read more about digital goods taxability in California here.

New Jersey – Digital goods are taxable

New Jersey has ruled that digital goods like movies, songs and e-books are taxable. However, digital goods accessed electronically but not delivered to the buyer’s device, such as a movie watched on a streaming service, are non-taxable. Further, digital subscriptions to magazines or access to digital images are also non-taxable. Read more about digital goods taxability in New Jersey here.

As you can see, the states that have given consideration to the taxation of digital goods, and tax them in different ways. Some states have passed or interpreted their existing sales tax laws as meaning that digital goods are taxable. Other states have passed new or interpreted their existing laws as meaning digital goods are non-taxable.

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It’s also vitally important to understand that sales tax rules and laws on digital goods are subject to change. Even regulations that look settled now can change later down the line as the market and economy changes.

If you sell digital goods, it’s vital to ensure you’re applying sales tax correctly in all of the states where you have sales tax nexus.

What is the sales tax on digital goods by state?

Over half of US states still consider digital goods taxable. Sometimes this is because a state has not considered digital product taxability yet and these products default to taxable. Though, some states (like the New Jersey example above) have made a law or ruling on digital goods taxability and decided that they are taxable. 

We recommend either contacting a state and local sales tax expert (SaLT) or carefully reading each state’s sales tax law. 

In the table below, we have included links to sales tax laws or guidance on digital goods taxability in states where that is applicable.

Sales tax for digital goods: Conclusion

The truth about sales tax on digital products is that it varies by state. This makes it difficult to know whether certain goods, like e-books, computer software, and digital videos, are taxed or not. The best way to tell whether goods are taxed is by speaking with a sales tax expert or using an automated sales tax solution like Zamp if you are selling various goods and services across states.