US digital services sales tax

In the U.S., there is no federal-level sales tax (a turnover tax). Individual states, cities, counties and municipalities are able to levy sales tax. As a result, there are more than 13,000 tax jurisdictions in the United States.

Just as it varies by country, the definition and taxability of digital services in the United States varies by state. And as in other countries, U.S. sales tax laws are subject to change. Approximately 30 states levy their sales taxes on digital, or electronic services. Most of them include foreign providers of digital services in obligation to charge and remit sales tax to the local authorities following the 2018 South Dakota vs Wayfair Supreme Court ruling.

Approximately 30 states tax some type of digital services (aka, electronic goods and services), but few tax them across the board. Some tax them quite narrowly, exempting most digital services but applying tax to digital goods such as apps and e-books. Approximately 16 states generally exempt digital goods and services from sales tax.

Those are broad strokes. Determining how sales tax applies to digital services in the U.S. is complicated by the following factors:

1. States do not adhere to universal definitions
2. States do not tax all digital goods and services the same
3. There are more than 13,000 tax jurisdictions in the United States

1. There are no universal definitions for digital services

   Since every state develops its own sales tax laws (minding certain constitutional constraints), there are no nationwide definitions for digital goods and services in the United States.

   Some states adhere to the definitions developed by the Streamlined Sales and Use Tax Agreement, or SST, which was created to simplify and modernize sales and use tax administration and reduce the burden of compliance. Unfortunately, the 24 member states aren’t required to adopt those definitions, and not all do.

   Some states have created their own laws to address the taxability of various digital products and services. Some treat e-services as telecommunications rather than tangible goods.

   Finally, some states don’t specifically define digital goods or services in their tax code, leaving their taxability open to interpretation.

2. Different digital services are taxed differently

   States that do tax some digital services often don’t tax them all. For example, Indiana taxes e-books sold to an end-user with rights for permanent use, but not e-books with rights of less than permanent use. It taxes prewritten/canned software that’s downloaded but exempts custom computer software delivered electronically or by load-and-leave.

   In California, sales of electronic products such as data, digital images, e-books, mobile applications, and software generally aren’t taxable because there’s no transfer of tangible personal property. But California taxes license renewals for periodic license-to-use fees on previously purchased canned software, as well as games transferred to customers through electronic means or otherwise.

   New York generally taxes prewritten computer software but not custom software. The license to use electronically downloaded software is generally exempt in Florida. And so on. There are trends, but there are always exceptions.

3. There are 13,000+ sales tax jurisdictions

   • 45 states and the District of Columbia have a general sales tax
   • 38 states (including the non-sales-tax-state of Alaska) have local sales taxes
   • There are 13,000+ taxing jurisdictions in the U.S.

    

   Product taxability rules are typically governed by the state, and 45 states plus D.C. have a general sales tax. Yet some taxes can also be levied by local jurisdictions: Chicago’s amusement tax applies to streaming services like Hulu and Netflix, as does a utility users tax in parts of California. And in the handful of home-rule states (e.g., Colorado), localities may have the authority to levy and administer local taxes.

   The more than 13,000 taxing jurisdictions in the United States translate to 13,000+ possible rates and reporting codes. Since most states base sales tax on the location where a digital good or service was first used, businesses selling digital goods and services across the U.S. may have to account for thousands of different rates and codes.

Get help solving your indirect tax challenges