State-by-state guide to the taxability of digital products

Updated December 2020; originally published February 2019.

Sales tax laws don’t always keep up with the times. Although more and more of us now use digital products in our work and fill our free time with ebooks, Spotify, and Netflix, many states still don’t tax the sale or rental of these products. That’s steadily changing.

Though there’s often resistance to expanding sales tax to previously exempt goods and services, including those that didn’t exist when sales tax was first levied, it’s gradually breaking down. Year after year, digital products shift from exempt to taxable in some parts of the world. On January 1, 2019, for example, several American states and Canadian provinces started to tax the sale of digital goods and services, and others are looking to follow suit. 

Defining digital products

The term “digital products” (or “digital property,” or “digital goods and services,” etc.) generally refers to the following:

  • Digital audio files (music, podcasts, ringtones, etc.)
  • Digital books (ebooks, magazines, newspapers)
  • Digital images and video files (photographs, television shows, movies)

These digital products often don't fit tidily into state sales tax definitions and laws because they 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 try to make old definitions and laws work for newer products. Some don’t tax digital products because they’re considered to be intangible, while others consider them tangible because they can be seen if not held. And some states use existing laws as guidelines: If a product is taxable in its tangible form, it’s taxable in its intangible form.

States that are members of the Streamlined Sales and Use Tax Agreement (SSUTA) adhere to uniform definitions for these products. However, the definitions aren’t linked to the taxability of digital products, which still varies from state to state.

Most frustratingly, some states simply don’t define these products or address the taxability of digital products. In these instances, guidance can sometimes be found in department of revenue letter rulings, in which the tax authorities answer questions from specific taxpayers; but that’s not the same thing as a law that applies to everyone.

Once determined, taxability rules need to be periodically confirmed because sales tax rates, rules, and regulations are subject to change. That’s true for all products and services, from clothing to food to spray tans, but it’s especially true for digital products. Both Connecticut and Rhode Island amended the taxability of certain digital products in 2019.

Below is a list of states that generally tax the sale and use of digital products, followed by a list of states that generally exempt them. Bear in mind that sales tax law is rarely black and white: For example, some states have specific rules for digital photographs; in others, subscriptions are taxed differently than one-time purchases. Whether a product is purchased or rented can affect taxability, as can whether it was transferred in conjunction with a physical storage device. And remember, taxability rules are subject to change.

In short, use the information below as a starting point. 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.

States that generally tax digital products

States that generally exempt digital goods and services

Five states don’t have a general sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon (the NOMAD states).

States often treat the sale of software differently than the sale of digital products. With software, taxability generally depends on whether the software is canned or custom, downloaded or delivered on tangible personal property, or software as a service (SaaS). Learn more about how sales tax applies to software.

Automating sales tax calculation, remittance, and returns makes handling product taxability changes more manageable.

 

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