Last updated July 18, 2016
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. TaxJar’s SmartCalcs sales tax 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. Stay tuned here for further posts on the taxability of software, SaaS and other digital taxation issues online seller need to know about.
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.
TaxJar’s SmartCalcs Sales Tax API Handles Digital Product Taxability
If all this has your head spinning, don’t worry. TaxJar’s SmartCalcs Sales Tax API allows you to assign a product tax code to the products you sell. If you assign the product tax code for digital goods (which is 31000) to the digital products you sell, SmartCalcs 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)
Connecticut – Digital products are taxable in Connecticut, but at a reduced rate of 1%. “Sales or purchases of ‘digital downloads’ from the Internet are subject to Connecticut sales or use tax. As long as no tangible personal property is provided in the transaction, sales or purchases of ‘digital downloads’ are treated as sales or purchases of computer and data processing services, and taxable at a 1% rate.” (Source)
In other words, digital products are taxed in Connecticut, but not at the same sales tax rate as most other tangible personal property. Instead, they are taxed at the same rate as other computer and data processing services: 1%.
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)
Hawaii – Digital products are taxable in Hawaii. They are subject to Hawaii general excise tax, as are most transactions (products and services) in Hawaii.
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.
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)
Illinois – Digital products are tax exempt in Illinois.
“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)
Iowa – Sales of digital products in Iowa are tax exempt if: “… the substance of the transaction is delivered to the purchaser digitally, electronically, or utilizing cable, or by radio waves, microwaves, satellites, or fiber optics.” (Source)
Louisiana – Digital products are taxable in Louisiana. “Digital or electronic products such as ‘canned’ computer software, electronic files, and ‘on demand’ audio and video downloads” are considered tangible personal property because they are perceptible to the senses and thus taxable. (Source)
Maine – Digital products are taxable in Maine. The only mention of digital products in Maine law is found in a bulletin regarding digital photography. In the bulletin, digital products are declared taxable in Maine. (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)
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. (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)
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 products are tax exempt in Rhode Island. This includes audio and audio visual works, books, movies, music, downloads and ringtones which are delivered electronically. (Source p. 4)
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)
If you need to charge sales tax on digital products in your online store, TaxJar’s SmartCalcs sales tax API takes all of these state laws into account and makes you job simple.
Do you have questions or something to say about the taxability of digital products? Start the conversation in the comments!