Quick framing

The sales-tax status of digital products — e-books, downloadable music, streaming subscriptions, online courses, cloud-hosted software (SaaS), and other electronically delivered items — is determined by state law, not federal tax code. Since the U.S. Supreme Court’s 2018 decision in South Dakota v. Wayfair, Inc., states have much broader authority to require remote sellers to collect sales tax, and many have used that authority to expand taxing regimes for digital goods. (South Dakota v. Wayfair, Inc., 2018.)

Below is a practical, state-aware guide I use when advising clients who sell digital products across state lines. It focuses on the three things that drive tax treatment: taxability definitions, nexus/economic presence, and sourcing rules.

Why state rules differ

  • Statutory language varies. Some states define “tangible personal property” in ways that include or exclude electronically delivered content; others tax certain “digital goods” or “digital automated services.”
  • Policy goals differ. Some states tax broadly to widen the base; others exempt digital goods to promote digital businesses.
  • Marketplace and nexus law differences — including marketplace facilitator statutes and economic nexus thresholds — change who collects tax.

Common categories and how states treat them

  • Downloads (permanent transfer): Many states make a distinction between a downloadable file (e.g., an MP3 you buy and keep) and streaming. Downloaded prewritten software is taxable in many states when delivered on a physical medium; states are split when delivery is electronic.
  • Streaming and subscriptions: Streaming services and subscription access to content may be taxed in some jurisdictions as a “digital good” or communication service; other states exclude them.
  • SaaS and cloud services: Highly state-dependent. Some states tax SaaS as a taxable service or digital product; others treat it as nontaxable intangible property or a service.
  • In-app purchases, microtransactions, virtual items: Taxability varies and depends on whether the item has a real-world counterpart or is consumable within a platform.

Practical compliance steps (step-by-step)

  1. Identify what you sell in plain language. Map product features: permanent download vs streaming, time-limited access vs perpetual, bundled with physical goods or standalone.
  2. Determine each state’s definition. Look up the state revenue department’s guidance for terms like “digital products,” “electronically delivered software,” “digital goods,” and “digital automated services.”
  3. Test nexus triggers. After Wayfair, many states use economic thresholds (commonly $100,000 in sales or 200 transactions, though thresholds vary). If you meet a state’s economic nexus, you may need to register and collect tax.
  4. Account for marketplace facilitator rules. If you sell on platforms (Amazon, Apple, Etsy), marketplace facilitator laws often make the platform responsible for collection and remittance — but not always for every item or every state.
  5. Source the sale correctly. States differ in “sourcing” rules: some tax based on the buyer’s location, others on seller location or where the service is received.
  6. Keep exemption documentation. When selling to exempt purchasers (government, resellers), collect proper certificates per state rules.
  7. Use automation for rates and product classification. Modern tax engines can reduce errors across many states and update rules regularly.

Examples and state tendencies (illustrative, not exhaustive)

  • Washington: Aggressively taxes many digital goods and digital services; revenue guidance broadly covers digital products. (See Washington Department of Revenue.)
  • New York: Taxes many electronically delivered products and certain software transactions; examine department bulletins for details. (See New York State Department of Taxation and Finance.)
  • California: Generally does not tax purely electronically delivered products in the same way it taxes tangible personal property, but there are nuanced rules for software and bundled transactions; check the California Department of Tax and Fee Administration (CDTFA).
  • Texas and Florida: Each state has a mixed approach — some digital products and certain services are taxable while others are excluded; state bulletins explain specific categories and exemptions.

Because each state’s statutory language and administrative rules change over time, always confirm using the state revenue department guidance for the relevant jurisdiction.

Common pitfalls I see in practice

  • Misclassifying product type: Sellers often label a product “service” to avoid tax without confirming the state’s definition. I advise clients to document the functional characteristics of the product and match them to statutory tests.
  • Ignoring marketplace facilitator rules: Sellers on platforms sometimes fail to confirm whether the platform collects tax for a particular jurisdiction or product type. That can leave a seller unexpectedly liable.
  • Poor recordkeeping: Without buyer location and invoice detail, it’s hard to substantiate sourcing or exemption claims in an audit.
  • Not monitoring economic nexus: A small business can unintentionally cross a sales threshold and trigger registration obligations mid-year.

Bundles and mixed transactions

When a digital product is bundled with taxable tangible goods, states use “allocation” or “primary function” rules to determine taxability. For example, if you sell an e-reader (taxable tangible good) bundled with downloadable books (possibly exempt in some states), the transaction may be taxed differently depending on the state’s bundling rules.

Marketplace facilitators and who collects

Most states adopted marketplace facilitator laws after Wayfair. Under those laws, marketplace platforms often collect and remit sales tax on behalf of third-party sellers. However, exceptions exist depending on the product, the state, and whether the facilitator meets thresholds. Always verify the contract terms and state statutes.

Economic nexus and thresholds

After Wayfair, each state set its own economic nexus rules. Common thresholds are $100,000 in sales or 200 separate transactions into the state, but several states use different numbers or sales-only triggers. Penalties and retroactive assessments vary, so tracking cumulative sales by state is critical.

Recordkeeping checklist for digital sellers

  • Product descriptions and product classifications mapped to state statutes
  • Sales by state and transaction counts
  • Customer billing and service addresses
  • Exemption/resale certificates and copies of marketplace seller statements
  • Monthly/quarterly/annual filings and payment records

Tools & technology

I often recommend tax automation platforms (e.g., tax calculation APIs, compliance engines) to clients selling nationwide. These tools can: classify products by state, apply correct rates, account for marketplace collections, and generate nexus reports. They’re not a substitute for legal advice, but they materially reduce compliance errors.

State resources and further reading

Frequently asked operational questions

  • Do I charge tax where my buyer lives or where I’m based? It depends. “Sourcing” rules vary; many states tax based on the buyer’s ship-to or service-use location. Confirm each state’s sourcing rules.
  • If a platform collects tax for me, am I still at risk? Potentially. If the platform incorrectly classifies your product, or an exemption applies, you may need to coordinate documentation and sometimes resolve discrepancies with the platform.
  • Are subscriptions treated differently? Yes. Time-based access or subscriptions are often analyzed separately from single-sale downloads — states may tax recurring access or treat it as a service.

Checklist before you sell interstate

  • Classify your products against each state’s legal taxonomy.
  • Monitor sales by state monthly to detect nexus triggers.
  • Decide whether to use a marketplace or direct sales model and understand collection responsibilities.
  • Establish systems to capture buyer location and exemption certificates.
  • Consult a tax professional for borderline cases (bundles, SaaS, in-app items).

Final practical takeaways

  1. Treat digital-product taxability as a moving target. States routinely update guidance; subscribe to state revenue notices.
  2. Use automation for calculation and nexus tracking, but maintain an authoritative legal review for product classification decisions.
  3. Keep thorough records; they’re your primary defense in a state review.

Professional disclaimer: This article is educational and informational only and does not constitute tax, legal, or accounting advice. For tailored guidance, consult a licensed tax professional or the state revenue department in the jurisdictions where you sell.

Sources and further reading

  • South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018).
  • Federation of Tax Administrators (taxadmin.org) — state-level sales tax resources and summaries.
  • State revenue department guidance for specific rules (search the revenue site for “digital products” or “electronically delivered software”).
  • FinHelp resources: see linked guides above for registration, nexus and digital-product compliance.