Digital goods are becoming an increasingly significant part of everyday spending, and this growth is great news for online businesses. You can sell to customers anywhere without packaging, storage, or shipping.
However, there’s a catch: sales tax rules were originally designed for physical products, and states have been scrambling to update their laws for items that are delivered electronically.
That’s why digital goods can feel confusing from a tax perspective. In one state, an ebook download might be treated like a taxable “product.” In another, it might be treated like a non-taxable “intangible.”
And in many places, the tax outcome depends on how the customer receives it. A permanent download can be taxed differently from a subscription or streaming access.
In this guide, we’ll break things down in simple terms so you can understand how sales tax applies to digital goods and why the rules can differ from state to state.
What are Digital Goods?
Digital goods are products delivered electronically rather than physically. Unlike traditional products that are shipped or handed to a customer, digital goods are accessed online and used on devices such as phones, computers, tablets, or smart TVs.
Even though these products are intangible, they still have value and are commonly bought and sold by businesses of all sizes.
When states talk about digital goods for sales tax purposes, they are usually focused on how the product is delivered and used, not just what the product is.
What counts as a digital good?
In general, a product is considered a digital good when:
- It is delivered electronically rather than shipped in a physical format. This includes products downloaded to a device, accessed via login, or streamed online.
- The customer uses the product digitally, such as reading, listening, watching, or interacting with it on a device, rather than owning a physical copy.
Because digital goods do not exist in physical form, states have had to decide whether and how to treat these products under existing sales tax rules.
Consuming something digitally vs owning it physically
States often draw an important distinction between digital use and physical ownership, even when the content itself is the same.
- Owning a physical product means the customer receives a tangible item, such as a printed book, a CD, or a DVD. Sales tax rules for these products are usually well established.
- Consuming a product digitally means the customer accesses the same content electronically, such as downloading an ebook, purchasing a digital movie file, or subscribing to a streaming service.
Even when the content is identical, the delivery method can affect how the transaction is taxed. This is one of the main reasons sales tax on digital goods by state can feel inconsistent.
Common examples of digital goods
Digital goods often include:
- Music and audio files that are downloaded or accessed digitally, such as songs, albums, or audiobooks.
- Ebooks and digital publications, including ebooks, digital magazines, and PDF guides.
- Apps and software downloads, such as paid mobile apps or downloadable desktop programs.
- Cloud-based software and SaaS tools that are accessed online through a subscription or account.
- Video games and downloadable content, including full digital games and in-game add-ons.
- Online courses and digital training materials are delivered through platforms or downloads.
- Streaming media, such as movies, TV shows, or music accessed through streaming services.
- Digital art, stock photos, videos, NFTs, and other creative digital assets.
- Licenses, activation keys, templates, and virtual tickets that unlock access to software, events, or content.
Important: Not everything “digital” is taxed the same way. Many states draw a legal line between specified digital products (like ebooks, music downloads, and movie downloads) and digital services (like SaaS subscriptions, hosted platforms, and certain online training access).
Why Sales Tax Laws for Digital Goods Are So Complicated
If you feel like digital sales tax rules are inconsistent, you’re not imagining it. The confusion usually comes from three big reasons.
Sales tax laws weren’t built for digital products
Most state sales tax laws were designed around one core idea: taxing “tangible personal property,” meaning physical items you can touch and hold. The problem is obvious: digital products don’t fit neatly into that definition, so states had to decide whether to:
- Treat digital goods like taxable products anyway, or
- Treat them as non-taxable intangible items, or
- Create brand-new categories and rules (which some states have done).
How the Wayfair decision changed digital sales tax
A major turning point was the U.S. Supreme Court’s South Dakota v. Wayfair decision (June 21, 2018).
Before Wayfair, many businesses only had to collect sales tax in states where they had a physical presence (like an office, employees, or inventory).
After Wayfair, states could require businesses to collect sales tax based on
economic nexus, which is a business connection created by sales activity in the state, even if the business never set foot there.
If you feel like digital sales tax rules are inconsistent, you’re not imagining it. The confusion usually comes from three big reasons.
States are still updating their rules
Even now, digital tax laws continue to evolve. Many states have expanded or clarified how their sales tax applies to digital products in recent years, which is why older blog posts and old assumptions can be risky.
A good example: Georgia began applying sales tax to certain digital goods starting January 1, 2024, after passing enabling legislation in 2023. This kind of change is exactly why sellers need current, state-specific guidance.
Why Digital Goods Are Taxed Differently by States
Here’s where people get tripped up. Two items can sound “digital,” but states may tax them differently depending on how they’re delivered and used.
These distinctions matter even if you’re selling something simple like ebooks or downloads.
Downloads vs. online access
States often treat these like different things:
- Permanent downloads: The customer purchases a file and keeps it (e.g., downloading an ebook or buying a movie download).
- Subscriptions or online access: The customer pays for access, often through a login, and may lose access if they stop paying (example: SaaS tools, membership libraries, or some digital course portals).
- Streaming or temporary access: The customer watches or listens without “owning” a file, or they rent access for a limited time (example: streaming a movie or renting it for 48 hours).
Why this matters: some states are more likely to tax “digital products you purchase” than “digital services you access,” even when the customer experience feels similar.
Physical products vs digital versions (same content, different tax outcome)
It’s common for states to treat a physical product and its digital version differently.
Example:
- Physical book: may be taxed normally, or may qualify for a special exemption in some states.
- Ebook: could be taxable as a digital product, or not taxable as an intangible item, depending on the state.
So if you sell both print and digital formats, you cannot assume the tax rule is the same for both.
Products that are exempt physically but taxable digitally
This is one of the most surprising areas for beginners: sometimes a product is commonly exempt in one format, but taxed in another.
Common examples where formats can be treated differently:
- Textbooks or educational materials: A printed book might be treated favorably in a state, while the digital version may not receive the same treatment.
- Newspapers and publications: Some states treat print newspapers differently than digital subscriptions.
- Certain “information products”: Reports, data, or publications can fall into special categories that vary by state.
The Streamlined Sales Tax (SST) and Digital Goods
Because sales tax rules vary so much from state to state, some states participate in an effort called the Streamlined Sales Tax Agreement, often referred to as SST.
The goal of SST is to make sales tax rules more consistent and easier for businesses to understand and follow, especially when selling across state lines.
What the Streamlined Sales Tax (SST) is
The Streamlined Sales Tax Agreement is a cooperative effort among participating states to simplify sales tax administration. States that adopt SST agree to use more uniform definitions, tax bases, and administrative processes. This helps reduce confusion for businesses that sell in multiple states, including those that sell digital products.
Not all states participate in SST, and participation does not mean all tax rules are identical. It simply provides a shared framework that some states choose to follow.
How SST defines digital products
Under SST, digital products are generally defined as products that are delivered electronically and are not tangible. This definition helps create a baseline understanding of what qualifies as a digital product, but it does not automatically determine whether that product is taxable.
Instead, SST focuses on classification, while individual states still decide taxability.
The three SST digital product categories
SST groups digital products into three main categories to help standardize how they are described:
- Digital audiovisual works, which include movies, television shows, and other video content delivered electronically. These can be downloaded or streamed, depending on the product.
- Digital audio works, which include music, audiobooks, and other audio content delivered digitally.
- Digital books, which include ebooks and other written content delivered in digital form.
These categories help states and businesses speak the same language when discussing digital products, but they do not dictate tax outcomes.
Why SST definitions don’t guarantee tax exemption
Even when a digital product fits neatly into one of the SST categories, that does not mean it is automatically exempt from sales tax. SST allows participating states to decide whether each category is taxable, partially taxable, or exempt under their own laws.
As a result, the same digital audiobook or ebook could be taxable in one SST state and non-taxable in another.
Because states retain control over taxability, businesses still need to review each state’s rules individually. SST can reduce complexity, but it does not replace state law. Sellers must still look at how each state treats specific digital products, delivery methods, and exemptions.
Sales Tax on Digital Goods by State
Sales tax on digital goods in the U.S. is determined at the state level, which means there is no single rule that applies nationwide. Understanding how states approach digital taxability starts with knowing how to read and interpret state-level rules.
| STATE |
Are digital goods taxable? |
Sales Tax on Digital Goods |
| Alabama |
Yes |
4% |
| Alaska |
Yes (local only) |
0% |
| Arizona |
Yes |
5.60% |
| Arkansas |
Yes |
6.50% |
| California |
Generally No. (If the sale includes any physical item, such as a printed copy or a flash drive, the entire transaction is usually taxable.) |
7.25% |
| Colorado |
Yes |
2.90% |
| Connecticut |
Yes |
6.35% |
| Delaware |
No (no sales tax) |
0% |
| District of Columbia |
Yes |
6% |
| Florida |
No |
6% |
| Georgia |
Yes |
4% |
| Hawaii |
Yes |
4% |
| Idaho |
Yes |
6% |
| Illinois |
Yes |
6.25% |
| Indiana |
Yes |
7% |
| Iowa |
Yes |
6% |
| Kansas |
Yes |
6.50% |
| Kentucky |
Yes |
6% |
| Louisiana |
Yes |
5.00% |
| Maine |
Yes |
5.50% |
| Maryland |
Yes |
6% |
| Massachusetts |
Yes |
6.25% |
| Michigan |
Yes |
6% |
| Minnesota |
Yes |
6.875% |
| Mississippi |
Yes |
7% |
| Missouri |
No |
4.225% |
| Montana |
Yes |
0% |
| Nebraska |
Yes |
5.50% |
| Nevada |
No |
6.85% |
| New Hampshire |
No (no sales tax) |
0% |
| New Jersey |
Yes |
6.625% |
| New Mexico |
Yes |
4.875% |
| New York |
Yes |
4% |
| North Carolina |
Yes |
4.75% |
| North Dakota |
Yes |
5% |
| Ohio |
Yes |
5.75% |
| Oklahoma |
No (Oklahoma generally taxes digital goods only when they are sold together with tangible personal property.) |
4.50% |
| Oregon |
No (no sales tax) |
0% |
| Pennsylvania |
Yes |
6% |
| Rhode Island |
Yes |
7% |
| South Carolina |
Yes |
6% |
| South Dakota |
Yes |
4.50% |
| Tennessee |
Yes |
7% |
| Texas |
Yes |
6.25% |
| Utah |
Yes |
4.85% |
| Vermont |
Yes |
6% |
| Virginia |
No |
4.30% |
| Washington |
Yes |
6.50% |
| West Virginia |
Yes |
6% |
| Wisconsin |
Yes |
5% |
| Wyoming |
Yes |
4% |
|
How to read state digital tax rules
When reviewing a state’s treatment of digital goods, there are a few key factors to pay attention to:
- Taxable vs non-taxable: Some states explicitly tax certain digital goods, while others exempt them or do not address them at all. In states without clear guidance, digital products may default to taxable or non-taxable depending on how the law is written.
- Local tax impact: Even if a state taxes digital goods, local counties or cities may add additional sales tax. This means the total tax rate can vary within the same state.
- Different digital product categories: States may tax downloads, subscriptions, and streaming services differently. A digital product being taxable does not always mean all digital formats are treated the same.
These differences are why sales tax on digital goods by state requires careful review rather than assumptions.
High-level state classification
At a broad level, states generally fall into one of three categories:
- States that generally tax digital goods, meaning they have laws or guidance that treat many digital products as taxable.
- States that generally do not tax digital goods, either because they exempt them or do not classify them as taxable products.
- States with no general sales tax at all, which means digital goods are not subject to sales tax by default.
Understanding Nexus for Digital Goods Sellers
Knowing whether a digital good is taxable is only part of the equation. You are only required to collect sales tax in a state if you have sales tax nexus there. Nexus is what connects your business to a state and creates the obligation to register, collect, and remit sales tax.
Physical nexus
Physical nexus is created when your business has a real-world presence in a state. Even digital businesses can trigger physical nexus in ways that are easy to overlook.
- Offices, employees, or inventory can establish nexus if you maintain a workspace, store inventory, or operate facilities in a state, even if digital goods are your primary product.
- Remote employees can create nexus simply by working from their home in another state. A single remote employee may be enough to trigger a sales tax obligation.
- Events and trade shows can also create nexus if your business regularly attends conferences, expos, or promotional events in a state, even if no direct sales occur onsite.
Economic nexus
Economic nexus focuses on your sales activity rather than physical presence. Most states adopted economic nexus rules after the Wayfair decision.
- Revenue thresholds are commonly set around a specific dollar amount of sales into a state, often measured annually.
- Transaction thresholds are based on the number of individual sales transactions, regardless of the dollar value of each sale.
- Non-taxable sales still count toward these thresholds, meaning that even if a state does not tax digital goods, those sales can still create nexus and trigger registration requirements.
Why do digital products trigger nexus faster?
Digital sellers often reach nexus thresholds more quickly than sellers of physical goods.
- Low-cost downloads can generate a high number of transactions in a short period of time.
- High transaction volume means a business can cross transaction thresholds without realizing it, especially with small-priced digital items.
- Marketplace involvement can complicate the nexus further, as some states have special rules for marketplace facilitators and third-party sellers of digital goods.
Common Digital Goods Sales Tax Traps
Digital goods sales tax mistakes are common, even for experienced sellers. Many of these issues stem from assumptions rather than intentional non-compliance.
- Assuming “digital equals non-taxable” can lead to under-collecting tax in states that treat digital goods as taxable products.
- Treating subscriptions and downloads the same is risky because many states tax permanent downloads differently from streaming or subscription access.
- Ignoring local taxes can result in under-collection, especially in states where cities and counties impose additional sales tax.
- Missing nexus in low-revenue states happens when sellers focus only on revenue thresholds and overlook transaction-based thresholds.
- Relying on outdated guidance can create compliance gaps, as digital tax rules change frequently and older assumptions may no longer apply.
Best Practices for Handling Sales Tax on Digital Goods
While sales tax on digital goods can feel complex, following consistent best practices can significantly reduce risk and stress.
Maintain strong sales records
Accurate records are essential for determining taxability and defending your decisions during an audit.
- Customer location proof helps establish where the sale took place and which state’s rules apply.
- Product taxability decisions should be documented so you can explain why tax was or was not collected.
- Exemption documentation is important if certain transactions qualify for exemptions under state law.
- Marketplace vs direct sales records help clarify who is responsible for collecting and remitting tax.
Be transparent with customers
Clear communication helps reduce confusion and customer disputes.
- Showing tax clearly at checkout makes it obvious how the final price is calculated.
- Explaining why tax applies can help customers understand why digital purchases may be taxed.
- Location-based rate differences should be reflected accurately to avoid over- or under-collection.
File and remit on time
Timely filing is just as important as collecting the correct amount of tax.
- Penalties for late filing can add up quickly and increase total tax liability.
- Audit risk often increases when filing patterns are inconsistent or incomplete.
- Consistency matters because regular, accurate filings build credibility with tax authorities.
Use automation where possible
Automation can significantly reduce manual effort and human error.
- Rate calculation tools help ensure the correct tax rate is applied based on location and product type.
- Filing support can streamline returns across multiple states.
- Nexus monitoring helps track when thresholds are met so obligations are not missed.
- State registration assistance can simplify the process of becoming compliant in new jurisdictions.
Digital Goods Still Carry Real Tax Risk
Selling digital goods may feel simpler than selling physical products, but the tax rules are often just as complex. Digital does not automatically mean tax-free, and state-by-state differences play a major role in determining sales tax obligations.
As states continue updating their tax laws to reflect the digital economy, compliance requirements will keep evolving. The good news is that sales tax on digital goods is manageable with the right approach, clear records, and reliable processes.
Taking a proactive approach to understanding sales tax on digital goods by state can help businesses avoid penalties, reduce audit risk, and stay focused on growth instead of compliance issues.
If tracking nexus, taxability rules, and filing requirements across multiple states feels overwhelming, TaxHero can help simplify the process. Contact us today!
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