Overview

States differ on whether digital goods and services are “sales taxable.” After the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc. (2018), states gained broader authority to require out-of-state sellers to collect sales tax based on economic activity, which led to more state-level rules for digital services (see South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018)). For current state specifics, consult state revenue departments and tax experts.

Why this matters

  • Remote sellers can face registration, collection, filing, and audit obligations in multiple states.
  • Misreading a state’s definition of taxable digital services can result in back taxes, penalties, and interest.
  • Marketplace and platform rules can shift collection responsibilities to marketplaces rather than sellers.

Key variations to watch

  • Tax base (what’s taxable). Some states treat digital downloads, streamed content, subscriptions, or SaaS as taxable; others exclude them or tax only specific types of digital property. For a practical state-by-state comparison, see FinHelp’s guide on state treatment of digital products.

  • Nexus and thresholds. States use economic thresholds (for example, $100,000 in sales or 200 transactions) or other activity tests to create sales tax nexus after Wayfair. Thresholds differ by state and update periodically—track each state’s current rule.

  • Sourcing rules. States decide whether sales are sourced to the buyer’s location, the seller’s location, or another location; sourcing affects which state’s tax applies.

  • Marketplace facilitator laws. Many states now require marketplaces to collect and remit sales tax on behalf of third-party sellers. That can reduce direct obligations for sellers but doesn’t eliminate all registration or reporting duties.

  • Exemptions and bundled sales. States often carve out exemptions (education, nonprofit sales, B2B resales) and apply different rules when digital services are bundled with taxable tangible goods or professional services.

Practical checklist for remote sellers

  1. Map your products: classify offerings as digital goods, digital services, or taxable tangible products.
  2. Confirm nexus triggers: check each state’s economic threshold and registration requirements. (See our hands-on nexus primer for digital businesses.)
  3. Determine taxability: consult the state revenue department or an up-to-date state chart to see whether your product is taxable.
  4. Set sourcing rules: configure checkout to tax using the correct sourcing method for each state.
  5. Use automation: consider tools like Avalara or TaxJar to apply changing rules and file returns.
  6. Monitor marketplace rules: verify whether a marketplace facilitator collects tax for you and whether paper reporting or registrations are still required.

Real-world context and common traps

In my practice I’ve seen small subscription businesses assume all U.S. digital sales are untaxed—which led to surprise liability when states with broad digital-service definitions audited prior-period sales. Common mistakes include:

  • Treating streaming and downloadable content the same when states do not.
  • Ignoring marketplace facilitator carve-outs that still require seller registration or reporting.
  • Failing to update product mappings after a feature or packaging change.

Resources and where to check

  • FinHelp: State-by-state roundup of digital product tax treatment (see “State Tax Rules — Sales Tax Treatment of Digital Products: State-by-State Differences” for specific state notes).
  • FinHelp nexus guidance: “How State Nexus Rules Apply to Digital Services and SaaS” and “State Sales Tax for Digital Goods: Who Must Collect?” for practical checks and registration steps.
  • How State Nexus Rules Apply to Digital Services and SaaS: https://finhelp.io/glossary/how-state-nexus-rules-apply-to-digital-services-and-saas/
  • State Sales Tax for Digital Goods: Who Must Collect?: https://finhelp.io/glossary/state-sales-tax-for-digital-goods-who-must-collect/
  • Sales Tax Institute: ongoing state summaries and updates.
  • State department of revenue websites: authoritative sources for rules, rates, and filing guidance.
  • U.S. Supreme Court: South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018) for the economic nexus standard.

Quick FAQs

Q: Do federal tax rules determine sales tax for digital services?
A: No. Sales tax is a state tax. Federal agencies like the IRS do not set state sales tax rules.

Q: If a marketplace collects tax, do I still need to register?
A: Often marketplaces collect, but some states still expect seller registration or require recordkeeping and reporting. Confirm with the marketplace and the state revenue department.

Professional tips

  • Keep a product-level taxability matrix and update it quarterly.
  • Run a nexus audit annually to confirm registrations against current thresholds.
  • Use a combination of automated tools and a tax adviser for rule interpretation—software handles rates and sourcing; a professional interprets exemptions and complex bundling rules.

Authoritative sources

  • South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018).
  • Sales Tax Institute: state-by-state guidance on digital goods and services.
  • State department of revenue sites (search the state name + “digital products” or “digital goods”) for definitive rules.

Disclaimer

This article is educational and does not constitute legal or tax advice. For personalized guidance, consult a qualified tax professional or your state revenue department.