State-by-state guide to the taxability of digital products
Determining how different states’ sales and use tax laws apply to digital products can be challenging. Though Americans increasingly stream games, movies, music, and other entertainment, read ebooks, and conduct business and personal activities online, some states still haven’t clearly defined how sales and use tax applies to digital goods and services.
Even where sales and use tax laws do account for some electronically transferred products, it can be difficult to determine whether sales and use tax applies to specific transactions. Technology is constantly evolving and products sold today don’t always fit neatly into laws made yesterday.
What are digital products?
Digital products often don't fit tidily into state sales tax definitions because the sales tax laws were created before such products were even conceived. All states with a sales tax apply it to most “tangible personal property” — but an ebook can’t be held like a physical book, and a streamed movie can’t be grasped like a DVD.
Nonetheless, some states have tried to make existing laws fit newer products. Some don’t tax digital products because they’re intangible, while others treat intangible goods as tangible personal property because they can be seen or experienced. And some states use existing laws as guidelines: If a product is taxable in its tangible form, then it’s taxable in its intangible form.
Determining the taxability of digital products is further challenged by the variability of electronically transferred goods and the fact that technology is constantly evolving.
To help simplify sales and use tax compliance, the 24 states that are members of the Streamlined Sales and Use Tax Agreement (SSUTA, or SST states) have adopted a standardized definition for certain electronically transferred products. “Specified digital products” includes digital audio works, digital audiovisual works, and digital books. However, these are merely standardized definitions: The taxability of these digital products still varies from state to state.
In some other states, sales tax laws neither define digital products nor address their taxability. Guidance can sometimes be found in department of revenue letter rulings, in which the tax authorities answer questions from specific taxpayers. “Generally, letter rulings apply across the board if the facts are the same,” explains Scott Peterson, Vice President of Government Relations at Avalara. “One taxpayer’s ruling can apply to every taxpayer with the same facts. A letter ruling is a state’s official opinion of how a law applies to a set of facts. Though not law, a letter ruling is binding on the state just like a law binds the state.”
Since it’s not possible to cover the taxability of every different electronically transferred transaction here, this post will focus on identifying how sales and use tax applies to the following:
- Digital audio files (music, podcasts, ringtones, etc.)
- Digital books (ebooks, magazines, newspapers)
- Digital games
- Digital photographs
- Streaming services (digital audiovisual works like television shows, movies, etc.)
We’ve included digital games and photographs because some states tax them differently from other digital goods.
Use the information below as a starting point, not as tax advice. Taxability often hinges on a variety of factors, such as the identity of the consumer (e.g., B2B transactions may be taxed differently from B2C transactions), or whether a digital good is transferred in conjunction with a physical storage device. There are often exceptions to taxability rules, especially where digital goods are concerned. And, of course, sales and use tax laws are subject to change at any time.
States that generally tax digital products
- Connecticut (the rate for digital goods and electronically accessed or transferred canned or prewritten software sold for personal use increased from 1% to the standard 6.35% effective October 1, 2019; electronically accessed or transferred canned or prewritten software sold to a business for business use remains subject to the 1% rate)
- Hawaii (digital products are subject to Hawaii’s general excise tax, or GET)
- Maryland (as of March 14, 2021)
- New Jersey
- New Mexico (additional information on sales tax sourcing rules)
- North Carolina
- South Dakota
- Texas (provided the tangible form is also taxable)
- Washington, D.C.
States that generally exempt digital goods and services
- Alaska (no state sales tax)
- California (note: local utility users tax may apply to streaming services)
- Delaware (no state sales tax)
- Florida (note: video and music streaming are subject to Florida communications services tax, or CST)
- Montana (no state sales tax)
- Nevada (download the state taxability matrix for more details)
- New Hampshire (no state sales tax)
- Oklahoma (see 710:65-19-156: Internet-related services and transactions)
- Oregon (no state sales tax)
States that tax some digital products and exempt others
- Arkansas (digital games are exempt; other digital products are taxable)
- Colorado (digital games are exempt; other digital products are taxable)
- Idaho (photographs delivered electronically are exempt; other digital products are taxable)
- Illinois (digital games are taxable; other digital products are exempt; Chicago amusement tax applies to streaming services in Chicago)
- Indiana (digital photographs are exempt; other digital products are taxable)
- Kansas (digital games are taxable; other digital products are exempt)
- Kentucky (digital videos are generally exempt; other digital products are taxable; see FAQ Sales and Use Tax)
- Massachusetts (digital games are taxable; other digital products are exempt)
- Michigan (digital games are viewed as software and taxable; other digital products are exempt)
- Minnesota (digital books, games, and audiovisual works are taxable; digital photographs and drawings are exempt along with charts and graphs, data or financial reports, and access to digital news articles)
- New York (digital games are taxable; other digital products are exempt)
- North Dakota (digital games are taxable; other digital products are exempt; see 57-39.2-04: Exemptions)
- Rhode Island (digital photographs don’t fall within Rhode Island’s definition of specified digital products and so are exempt; other digital products are taxable; see Tax Advisory 2019-25)
- South Carolina (South Carolina doesn’t tax software delivered by electronic means, and since digital books are delivered electronically, they’re considered exempt; other digital products, including streamed services, are taxable)
- Tennessee (digital photographs are exempt; sales tax applies to other digital products, including sales of final artwork transferred electronically)
- Vermont (digital photographs are exempt; other digital products are taxable)
- West Virginia (digital books are exempt; streaming services are subject to sales tax)
How to source sales of digital products
Where digital goods and services are subject to sales tax, you need to know how to source each transaction. Sourcing sales of electronically transferred products can be more complicated than sourcing sales of tangible goods because of the nature of digital goods. A resident of Texas can easily purchase and download a digital book while vacationing in Hawaii or Maine. A resident of Washington state may stream a movie from a hotel in Chicago or an apartment in Massachusetts.
For the most part, sales of digital products follow destination sourcing rules, either the location where the buyer first makes use of a product or the buyer’s billing address. However, sourcing rules within a state may vary depending on where the seller and the buyer are located when the transaction occurs.
To determine the actual taxability of products you sell or lease, consult with a tax professional or the state tax authorities. Using tax automation software can also help make sure you collect and remit sales and use tax as required.
This post was updated April 2022; it was originally published February 2019.
Cover photo by Canva
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