Is there a sales tax on digital goods?
Looking for sales tax treatment of software as a service (SaaS)? Check out our Guide to Sales Tax on SaaS.
In brief:
- Consumers these days are more likely to download or stream a song than buy it on a tangible medium. But states disagree on whether these digital products are taxable
- Some states consider digital goods to be “tangible personal property” and thus taxable. Others do not
- Some states also tax digital goods by how they are used. A streaming service might be non-taxable while the outright purchase of a TV show, even digitally, may be taxable
When was the last time you bought a BluRay disc? Or a CD?
More and more products that used to be “tangible personal property” are now consumed in digital form. Books are becoming e-books. Newspapers are accessed online instead of at the end of your driveway.
This has created a level of confusion when it comes to how to charge sales tax on these goods. Can a song downloaded through iTunes be “tangible personal property”?
Digital goods retailers are asking that question, and so are the states that make sales tax laws.
This article explores the state of sales tax on digital products as they stand now.
How US States Tax Digital Goods
It’s very important to note that sales tax rules and laws tend to lag behind the market as a whole. Because of this, some states simply haven’t made a determination one way or another whether digital goods are taxable.
What are digital goods?
Most US states 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
The Many Varying Ways Digital Goods are Taxed
Each US state makes its own rules when it comes to taxing digital products.
In most cases, sales tax experts and states agree that the default should be “digital goods are taxable unless otherwise stated.”
Simple, right? Just charge sales tax on e-books, ringtones, and downloaded entertainment.
Not so fast. Some states have made a determination when it comes to digital goods on sales tax and have decided that no, these items are not taxable.
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 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 at all 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.
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.
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.
List of States in a Table
| State | Are digital goods taxable? | Source |
| Alabama | Yes | Alabama Department of Revenue |
| Alaska | Yes, while Alaska has no statewide sales tax, local areas that have a sales tax impose sales tax on digital goods | Alaska Remote Sellers Sales Tax Commission |
| Arizona | Yes | Arizona Department of Revenue |
| Arkansas | Yes | Arkansas Department of Finance and Administration |
| California | No | California Department of Tax and Fee Administration |
| Colorado | Yes | Code of Colorado Regulations |
| Connecticut | Yes (Digital goods in Connecticut were taxed at a reduced rate of 1% until October 1, 2019). | Connecticut Department of Revenue Services |
| Florida | No | Florida Administrative Code |
| Georgia | No | Rules and Regulations of the State of Georgia |
| Hawaii | Yes | Hawaii Department of Taxation |
| Idaho | Yes as long as the buyer has permanent access; temporarily accessed digital goods are not taxable in Idaho | Idaho Statutes |
| Illinois | No | Illinois Administrative Code |
| Indiana | Yes as long as the buyer has permanent access; temporarily accessed digital goods are not taxable in Indiana | Indiana Department of Revenue |
| Iowa | Yes (Digital goods in Iowa were non-taxable before January 1, 2019) | Iowa Department of Revenue |
| Kansas | No | Kansas Department of Revenue |
| Kentucky | Yes | Kentucky Sales Tax Facts, Vol. 6, No. 1 |
| Louisiana | Yes as long as the buyer has permanent access; temporarily accessed digital goods are not taxable in Louisiana | Louisiana Department of Revenue |
| Maine | Yes | Maine Revenue Services |
| Maryland | Yes | Comptroller of Maryland |
| Massachusetts | No | Massachusetts Department of Revenue |
| Michigan | No | Michigan Department of Treasury |
| Minnesota | Yes, though student’s digital textbooks and other instructional materials are tax exempt | Minnesota Department of Revenue |
| Mississippi | Yes | Mississippi Annotated Code (via Justia) |
| Missouri | No | Missouri Revised Statutes & Missouri Department of Revenue |
| Nebraska | Yes | Nebraska Department of Revenue |
| Nevada | No | Nevada Department of Taxation |
| New Jersey | Yes, both permanent and temporary access to digital goods is taxable in New Jersey. However, video-on-demand (VOD) and streaming services are non-taxable in New Jersey. | New Jersey Division of Taxation |
| New Mexico | Yes | New Mexico Statutes (via Justia) |
| New York | No | New York Department of Taxation and Finance Advisory Opinion; More guidance on e-books |
| North Carolina | Yes | North Carolina Department of Revenue |
| North Dakota | No | North Dakota Code |
| Ohio | Yes | Ohio Department of Taxation |
| Oklahoma | No | Oklahoma Tax Commission |
| Pennsylvania | Yes, both digital goods and streaming services are taxable. However, purchases of digital goods by a qualified charitable organization or nonprofit are exempt. Newspaper and magazine subscriptions or the resale of a digital product are also exempt. | Pennsylvania Department of Revenue |
| Rhode Island | Yes; Rhode Island began taxing digital products and streaming services on October 1, 2019 | Rhode Island Division of Taxation |
| South Carolina | Yes - but with room for interpretation. While digital downloads are not expressly codified as taxable the state has provided guidance that streaming services are taxable | South Carolina Department of Revenue |
| South Dakota | Yes | South Dakota Department of Revenue |
| Tennessee | Yes; Rather than being taxed at state + all local rates, digital products sold in Tennessee are taxed at the state’s 7% rate + a standardized 2.5% local rate; Products like video games and digital magazines, periodicals or newspapers are not subject to the Tennessee sales tax; Textbooks that would be tax exempt in Tennessee are also exempt if sold in digital form | Tennessee Department of Revenue |
| Texas | Yes | Texas Comptroller |
| Utah | Yes | Utah State Tax Commission |
| Vermont | Yes | Vermont Department of Taxes |
| Virginia | No | Virginia Tax |
| Washington | Yes | Washington Department of Revenue |
| Washington DC | Yes | Washington DC Office of Tax and Revenue |
| West Virginia | No; however streaming services are taxable in West Virginia | West Virginia Taxability Matrix (SST) |
| Wisconsin | Yes | Wisconsin Department of Revenue |
| Wyoming | Yes | Wyoming Taxability Matrix (SST) |
Frequently Asked Questions about Digital Product Sales Tax
Are newspapers accessed online subject to sales tax?
This depends on the state. Physical newspapers are not taxable in a majority of US states. And many of those same states do not tax digital goods where their physical equivalent is non-taxable. We advise checking with each individual state to determine if digitally accessed newspapers are taxable.
I sell my digital products through a marketplace like Etsy. Do I have to collect sales tax?
Online marketplaces are generally required to collect sales tax on behalf of the 3rd-party sellers who sell on their site. For example, if you sell downloadable books of sewing patterns on Etsy, Etsy would be responsible for collecting sales tax from buyers on your behalf. Read more about sales tax and online marketplaces here.
