Why this matters now

The shift of commerce from physical stores to apps and online marketplaces has made “where” a sale occurs less obvious. Since the 2018 Supreme Court decision in South Dakota v. Wayfair, Inc., states have broad authority to impose sales tax obligations based on economic activity rather than physical presence (SCOTUS, 2018). That change matters especially for virtual goods (downloadable content, digital currencies, in‑game items) and in‑app purchases because tax rules vary by state and platforms often introduce additional collection rules.

In my practice advising software, gaming, and subscription businesses for over 15 years, I’ve seen small omissions become large liabilities. The good news: with clear tracking, the right tools, and timely registrations you can limit exposure and stay compliant.

How nexus is established for digital sales

States typically assert nexus in several ways. Any one of these can create a registration and collection obligation:

  • Physical presence: traditional triggers such as offices, warehouses, employees, or even server equipment located in a state. Some states consider colocated servers or data centers to be a physical presence; check the state department of revenue guidance for specifics.

  • Economic nexus: a bright‑line threshold based on revenue or transaction count from customers in the state. Many states use thresholds such as $100,000 in sales or 200 transactions (or similar variants), but thresholds vary. After Wayfair, nearly every state adopted an economic nexus standard; consult each state’s rules before assuming you’re below the line.

  • Marketplace facilitator laws: many states require platforms (Apple App Store, Google Play, or other app stores and marketplaces) to collect and remit sales tax on behalf of sellers. When platform rules apply, the marketplace usually remits tax, and the app developer may not need to collect — but you still must confirm which party the state considers responsible.

  • Click‑through and affiliate nexus: states may treat referral arrangements (affiliates, advertising partners, or referral links) as nexus‑creating if they generate a threshold level of sales.

  • Other factors: presence of independent contractors, sales agents, or frequent, regular solicitation of business in a state can create nexus under certain state laws.

Source: South Dakota v. Wayfair (2018); state department of revenue guidance (see your state DOR).

Are virtual goods taxable?

There is no single federal rule. Taxability of digital goods and in‑app purchases is a state decision. States take different approaches:

  • Some states tax digital goods the same as tangible personal property.
  • Others exempt certain categories (e.g., subscriptions to news or education services, some SaaS transactions, or tokens used for games) depending on statutory language and administrative rulings.

Because taxability is state‑specific and fact‑driven, treat every product line as potentially taxable and verify whether your particular item (e.g., a cosmetic in‑game skin vs. a permanent software license) has a different treatment.

Tip: review the state Department of Revenue rulings for products that appear similar to yours before assuming an exemption.

Marketplace facilitators and app stores — what to expect

Many states have passed marketplace facilitator laws that shift collection responsibility to platforms. In practice that means:

  • If Apple or Google is treated as the marketplace facilitator, they may collect and remit sales tax for transactions processed through their stores.
  • If you sell directly (e.g., through your own payment gateway outside a major app store), you remain responsible for collection and remittance.

Always confirm: platforms differ in how they handle taxes and whether they apply to in‑app purchases, cross‑border sales, or subscriptions. Documentation from the marketplace and state DOR guidance will clarify responsibilities.

Practical compliance steps (actionable checklist)

  1. Map sales by state and by product type. Keep at least three years of state‑level sales detail (some audits look back longer).
  2. Identify triggers: review revenue/transaction thresholds and affiliate/click‑through rules in each state where you have customers.
  3. Confirm marketplace responsibilities: obtain written statements or terms from platforms showing whether they collect/remit taxes for your transactions.
  4. Register proactively in states where you meet nexus standards. Voluntary registration can reduce exposure and open options for limited lookback periods or voluntary disclosure agreements if you need to resolve prior liabilities.
  5. Use tax automation: consider services such as Avalara, TaxJar, or similar for address‑level taxability, nexus monitoring, and return filing — these tools don’t replace professional advice but reduce manual error.
  6. Keep product descriptions precise: small wording differences can change tax treatment (e.g., “virtual currency” vs. “downloadable content”).
  7. Track marketplace‑versus‑direct sales separately in accounting so you know which transactions you are responsible for.

Common mistakes and how to avoid them

  • Assuming no physical presence means no nexus. Economic nexus and marketplace laws often apply without any physical footprint.
  • Relying on stale thresholds. States update thresholds and rulings; schedule an annual review of your nexus map.
  • Not documenting marketplace collection. Even when a marketplace collects tax, keep records proving the marketplace’s role in collecting and remitting.
  • Under‑reporting multi‑state sales because of aggregated accounting. Use customer‑level geographic data rather than billing address alone when states require destination‑based sourcing.

Handling audits and past liabilities

If a state alleges you had nexus and unpaid tax, options may include voluntary disclosure agreements (VDAs), negotiated payment plans, and sometimes partial relief for reasonable reliance on marketplace statements. VDAs limit the lookback period and often reduce penalties; consult a state tax professional immediately when contacted.

In my experience, preparing a clean nexus and sales report and engaging the state early yields materially better outcomes than waiting for a formal audit notice.

Recordkeeping and documentation

Keep these records for each state you sell into:

  • Sales ledgers by customer ZIP+4 or state
  • Platform statements showing tax collected and remitted
  • Contracts with affiliates, agents, or referral partners
  • Evidence of physical presence (leases, server contracts, employee payroll)

Retention: follow state statute of limitations guidance, but retain key records for at least four years; more if you have complex offshore or marketplace arrangements.

Example scenarios

  • Small game studio using only Apple App Store: Apple may collect sales tax in many jurisdictions under marketplace facilitator laws, but you still need to confirm and retain Apple reports showing tax remittance.

  • SaaS firm selling subscriptions via its own checkout: if sales in State X exceed the state’s economic nexus threshold, the firm must register and begin collecting tax if State X treats the subscription as taxable.

  • Seller with affiliates who drive traffic and purchases in State Y: if State Y’s click‑through nexus rules apply, the seller may have a nexus obligation even without employees or servers there.

Frequently asked questions

Q: Do I owe use tax if my app users are in multiple states?
A: Use tax is generally a consumer obligation, but many states enforce collection through sellers. If marketplace or seller doesn’t collect, customers may be liable — but states can audit sellers for not collecting when seller obligations exist.

Q: Will Apple/Google always handle tax collection?
A: No — it depends on the marketplace terms and the state’s facilitator law. Always confirm with the platform and state guidance.

Q: How far back can a state audit me?
A: Audit lookback periods vary. Voluntary disclosure agreements can limit the period for which a state will assess tax.

  • South Dakota v. Wayfair, Inc. (U.S. Supreme Court, 2018) — key decision on economic nexus. (SCOTUS)
  • Consumer Financial Protection Bureau (for general consumer protections): https://www.consumerfinance.gov/
  • For state‑specific rules, consult the applicable state Department of Revenue website.

Internal resources on FinHelp:

Closing advice and disclaimer

State nexus for virtual goods and in‑app purchases is a fluid area of tax law. My practical recommendation: track sales by state, confirm marketplace roles, and use automation plus periodic professional review. Early documentation and prompt registrations typically reduce audit exposure.

This article is educational and does not constitute tax or legal advice. Consult a qualified tax advisor or state tax counsel for decisions specific to your business.