Critical checklist: Sales Tax for SaaS
Sales Tax by State: Should You Charge Sales Tax on Digital Products?
byFebruary 13, 2018
Last updated April 2022
As more and more of the world goes digital, the question of whether or not to charge sales tax on digital products plagues more business owners.
Before we explore this question of where to charge sales tax on digital products, it’s important to note that sales tax laws and regulations are written and passed by states, and that many state laws are way behind when it comes to current technology. Many states haven’t explicitly written laws or regulations covering the taxability of digital goods. States may even base their rulings regarding things like digital eBook downloads or digital music sales on laws that were originally written with mail order companies in mind. For this reason, it is very important to take this post as a guideline and base your own sales tax compliance on conversations with your CPA or tax attorney and/or the state’s taxing authority.
Laws regarding digital products are literally being changed or reinterpreted all the time.
At TaxJar, we’re serious about crowdsourcing as much sales tax information as we can. So if you have an experience with sales tax on digital products that you want us to know about, we want to hear it in the comments on this post. (If you sell digital products and these big warnings have you worried, don’t sweat it. The TaxJar API handles all this for you in your online store. More on that later.)
With that big warning out of the way, let’s talk about some of the major ways states treat digital products when it comes to sales tax.
Digital Products, Defined
For the purposes of this blog post, we are going to focus on focus on digital products such as movies, books and eBooks, music, ringtones, photographs and magazine and newspaper subscriptions.
Notably, I won’t be talking about computer software (including software as a service (SaaS)) in this particular post, because many states treat software differently than digital products like eBooks. You can read our post on the taxability of SaaS here.
Downloads vs. Digital Products Accessed Online
One of the trends we immediately noticed is that some states differentiate between digital products that you download to your own device and digital products that you access online but don’t download. (Expect to see states using language like “transferred electronically” to mean something downloaded or otherwise electronically accessed.)
Example: Some states consider you buying a movie and having it transferred electronically to your possession to be taxable, while “renting” that movie for a limited period of time is not taxable. So in this logic, you could buy and download a movie on a site like Amazon and pay tax on it, or “rent” it for a limited period of time on Amazon Prime Video and not pay tax on it.
Physical Property v. Digital Downloads
Another distinction we saw was the difference in taxability between software, music, movies etc. bought in physical format (i.e. on a DVD) vs. software bought or accessed online. Software, movies, music and the like bought in a physical format were considered “tangible personal property” and subject to sales tax in essentially every state. But some states considered the equivalent product purchased and accessed electronically to be taxable, while others did not (presumably since it wasn’t purchased in a physical format.) For the states who consider digital products “tangible personal property” many of them state that the product is tangible because it can be “perceived by the senses.”
Products that are Normally Tax Exempt in Non-Digital Format
Some states specify that digital products are taxable in the state, but only if their physical equivalent is also taxable.
For example, in Colorado physical newspapers that qualify as a “legal publication” are not taxable. And since a digital copy of that type of newspaper is considered another form of the newspaper, then a digital newspaper wouldn’t be taxable. On the other hand, non-“legal publication” newspapers, books, music, movies, etc. in digital form are taxable in Colorado in both physical and digital format.
The law is similar in Minnesota. Digital products are taxable in Minnesota, but textbooks are not. By their logic, digital books would be taxable, but digital textbooks are tax exempt.
Collect Sales Tax When you Have Nexus
Also keep in mind that in the U.S. you are only required to collect sales tax in states where your business has nexus. Click here for more about sales tax nexus.
The TaxJar API Handles Digital Product Taxability
If all this has your head spinning, don’t worry. The TaxJar API allows you to assign a product tax code to the products you sell. If you assign the product tax code for digital goods to the digital products you sell, the TaxJar API automatically charges your customer in any state the right amount of sales tax depending on that state’s applicable laws.
In Which States Should You Charge Sales Tax on Digital Products?
Keep in mind we’re referring to digital goods like movies, books and eBooks, music, ringtones, photographs and newspaper and magazine subscriptions in this post.
Arizona – Digital products are taxable in Arizona. Digital downloads are generally considered tangible personal property and are subject to gross receipts tax (Arizona’s answer to sales tax.) (Source)
California – Digital products are tax exempt in California. The “sale of electronic data products such as software, data, digital books (eBooks), mobile applications and digital images is generally not taxable” (though if you provide some sort of physical copy or physical storage medium then the sale is taxable.) (Source: California BOE Publication 109 – “Non Taxable Sales”).
Colorado – Digital products are taxable in Colorado. Digital goods like music, movies, eBooks, magazines etc. are considered tangible personal property because they are “perceptible by the senses” and are therefore taxable. (Electronic delivery of “legal publication” newspapers are exempt, since physical copies of those same newspapers are exempt.) (Source). We’d also like to point out that home rule jurisdictions may have different taxability rules than the state.
Connecticut – Digital products are taxable in Connecticut. Effective October 1, 2019, sales of “digital goods,” which includes audio works, visual works, audio-visual works, reading materials or ring tones, which are electronically accessed or transferred, will be subject to sales and use taxes at the standard 6.35% rate. (Source)
Florida – Digital products are tax exempt in Florida. Items sold in digital form are not considered “tangible personal property” and are therefore not taxable. Though, if the item is sold in conjunction with tangible personal property then the entire sale would most likely be subject to Florida sales tax. (Source)
Idaho – Digital products in Idaho are taxable when the purchaser has the permanent right to use the product. When the purchaser is leasing or renting the item, it is tax exempt. If the right to use digital music, digital books, digital videos or digital games is conditioned upon continued payment from the purchaser it is not a permanent right of use. (Source)
Here’s exactly what Idaho has to say about the distinction:
“Digital music, digital books, and digital videos are tangible personal property regardless of the delivery or access method, but only if the purchaser has a permanent right to use the digital music, digital books, or digital videos. When the purchaser has a permanent right to use these digital products, the sale is taxable. Leases or rentals of these digital products are not taxable.” Using the same reasoning (that you access them in a fixed quantity or for a fixed period of time, digital subscriptions are also non-taxable. (Source p. 22-23)
“Information or data that is downloaded electronically, such as downloaded books, musical recordings, newspapers or magazines, does not constitute the transfer of tangible personal property. These types of transactions represent the transfer of intangibles and are thus not subject to Retailer’s Occupation and Use Tax.” (Source)
Maine – Digital products are taxable in Maine. The sale of a digital product is subject to the general rate of tax if the nondigital physical form would be subject to sales tax. For instance, the sale of digital music, books, magazines, newspapers, and movies are taxable since the sale of a CD, paper-bound book, DVD, and printed magazines and newspapers are taxable. The sale of a digital copy of a publication is taxable provided the publication is downloadable to the subscriber’s electronic device. If the subscriber is allowed only to access and view an online version of the publication and the digital copy may not be downloaded, the subscription is not taxable. (Source)
Massachusetts – Digital products are tax exempt in Massachusetts. This includes “Digital products delivered electronically, including but not limited to music, video, reading materials or ring tones.” (Source)
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Minnesota – Digital products are taxable in Minnesota. Digital products are considered tangible personal property in the state, though students’ digital textbooks and instructional materials are exempt. (Source)
Mississippi – Digital products are taxable in Mississippi. This applies whether sold permanently or less-than-permanently and whether or not the seller requires continued payment for access to the products are taxable in Mississippi. School textbooks are not taxable. (Source)
Missouri – Digital products are tax exempt in Missouri. Entertainment such as music or videos, pictures, newspapers, subscriptions and other electronic products are not considered tangible personal property in Missouri. (Source)
Nebraska – Digital products are taxable in Nebraska. This includes the sale of digital music, movies, TV shows, and digital books. Digital codes sold to access digital products are also taxable in Nebraska. (Source)
New Jersey – Digital products are taxable in New Jersey. This includes digital audio-visual works like movies, audio works like music and ringtones and digital books. (Source) Streaming services are non-taxable in New Jersey. (Source)
New York – Digital products are tax exempt in New York. This includes products transferred electronically such as music, ringtones, movies and books. (Source) Additional support can be found here and here.
Though, there are some exceptions when it comes to eBooks, which you can read here.
North Carolina – Digital products are taxable in North Carolina. Digital audio works, audiovisual works, books, magazines, newspapers, newsletters, reports or other publications, photographs or greeting cards delivered electronically are all considered tangible personal property in North Carolina. (Source)
North Dakota – Digital products are tax exempt in North Dakota. Specified digital products including digital audio-visual works, digital audio works, and digital books transferred electronically are considered non-taxable in North Dakota. (Source)
Ohio – Some digital products are taxable in Ohio. These include digital audiovisual work, digital audio work (including music and ringtones), and digital books and it doesn’t matter if they’re sold for permanent or “less than permanent” use. (Source)
Rhode Island – Digital goods are taxable in Rhode Island. A 7% sales and use tax will apply to specified digital products starting October 1, 2019. The term “specified digital products” means digital movies, digital TV shows, digital books, digital music, and related items that are streamed or downloaded to computers, phones, or other devices. (Source)
South Carolina – Digital products are not taxable in South Carolina. Digital products are not specifically included in the definition of tangible personal property. (Source). Additional resources here.
Virginia – Digital products are tax exempt in Virginia. This includes digital products delivered electronically, such as software, downloaded music, ringtones and reading materials are tax exempt in Virginia. (Source)
Washington – Digital products are taxable in Washington. Sales or use tax apply to all digital products, regardless of how they are accessed (downloaded, streamed, subscription service, networking, etc.). This includes downloaded digital goods like music and movies, streamed and accessed digital goods, and digital automated services. (Source)
Washington DC – As of January 1, 2019, digital goods in Washington D.C. are taxable. For purposes of the sales and use tax, D.C. Code § 47-2001(d-1) defines the term “digital goods” to mean digital audiovisual works, digital audio works, digital books, digital codes, digital applications and games, and any other otherwise taxable tangible personal property electronically or digitally delivered, whether electronically or digitally delivered, streamed or accessed and whether purchased singly, by subscription or in any other manner, including maintenance, updates and support. (Source)
Wyoming – Digital products are taxable in Wyoming. This includes digital audio works, audio visual works and books. Specific digital products where the purchaser receives permanent use of the digital product are taxable. If it is less than permanent use, it is not taxable. (Source)
If you need to charge sales tax on digital products in your online store, the TaxJar API takes all of these state laws into account and makes you job simple.
Learn how subscription billing impacts sales tax compliance
The complexities around sales tax compliance and subscription billing for SaaS are increasing. Understand the implications of subscription billing on your sales tax obligations in this webinar from the experts at TaxJar and Chargebee.Watch the webinar