Digital Products and State Sales Tax: Nexus, Registration, and Remittance

How does state sales tax apply to digital products?

Digital products and state sales tax is the set of rules states use to decide if sales of nonphysical goods—downloadable software, streaming, e-books, SaaS subscriptions, online courses—are subject to sales tax. Taxability and reporting obligations vary by state and depend on whether a seller has nexus (an economic or physical connection) in that state, how the state defines the digital product, and its sourcing rules.

Why this matters now

The Supreme Court’s decision in South Dakota v. Wayfair, Inc. (138 S. Ct. 2080 (2018)) allowed states to require out-of-state sellers to collect sales tax based on economic activity rather than physical presence. Since then, most states adopted economic nexus thresholds (commonly $100,000–$200,000 in sales or a set number of transactions annually, or a combination). Because states differ in definitions and sourcing rules, the same digital product can be taxable in one state and exempt in another.

(For the full Wayfair opinion, see the U.S. Supreme Court opinion in South Dakota v. Wayfair.)

How nexus commonly arises for sellers of digital products

• Economic nexus: Many states set a threshold by revenue or transaction count. Typical thresholds include $100,000 in sales or 200 transactions in a 12-month period, but thresholds vary by state. Check each state’s statute or the Tax Foundation for summary tables.
• Physical presence: Traditional nexus still applies if you have employees, contractors, inventory, servers, or offices in the state.
• Marketplace and marketplace facilitator rules: If you sell through a marketplace (Amazon, Etsy, App Store), many states require the marketplace to collect and remit tax on behalf of third‑party sellers. Sellers still need to understand reporting and exemption certificate rules.
• Digital activities: Targeted advertising, in-state digital infrastructure, or other digital interactions can be treated as creating nexus in a few jurisdictions. These rules are evolving and fact-specific.

States vary widely. For a deeper primer on digital and SaaS nexus, see the FinHelp entry “Understanding Nexus for SaaS and Digital Services” and our post on “Nexus and Sales Tax for Remote Sellers After Wayfair.” More general state nexus rules are summarized in “State Nexus Rules: When Your Business Owes State Taxes.” (Internal links: https://finhelp.io/glossary/understanding-nexus-for-saas-and-digital-services/, https://finhelp.io/glossary/nexus-and-sales-tax-for-remote-sellers-after-wayfair/, https://finhelp.io/glossary/state-nexus-rules-when-your-business-owes-state-taxes/)

What digital products are taxed (typical categories and variability)

• Downloadable software (perpetual license or one-time download): Often taxable as tangible personal property or digital goods in many states.
• Software-as-a-Service (SaaS) / cloud-hosted software: Taxability ranges from fully taxable to exempt service—some states tax SaaS as taxable “digital goods,” others treat it as nontaxable services.
• Streaming (music, video): Some states tax streaming; others exempt it. Rules may depend on whether the service is a bundled access fee or a separately billed download.
• E-books and digital newspapers: Several states tax e-books, but not all. Some states tax them at the same rate as printed books; others exempt them.
• Online courses and digital training: Taxability depends on whether the content is educational, the delivery method, and state law. Many states tax prerecorded or on-demand content; instructor-led training may be treated differently.

Because definitions differ, the same SKU may be taxable in State A but exempt in State B. Always read the relevant state tax authority guidance (e.g., California Department of Tax and Fee Administration for CA rules) and document your reasoning.

Sourcing rules: where is a sale sourced for sales tax?

Most states follow destination-based sourcing: the sale is sourced to the customer’s location (shipping address, billing address, or the customer’s location for services). A minority follow origin-based sourcing. For digital products, states adopt special sourcing rules (billing address, IP address, or the customer’s primary place of use). Sourcing determines which state’s tax rate and rules apply.

Registration, collection, and remittance — practical steps

1. Determine nexus state-by-state

• Review where you have economic or physical nexus. Start with revenue and transaction volume tests and consider employees, servers, and marketplace activity.

1. Evaluate product taxability in each state

• Map your product catalog to state taxability charts. Use state tax bulletins and private tax research resources as a cross-check.

1. Register where required

• Register for a sales and use tax permit with each state where you have nexus before you start collecting tax. Registration portals and thresholds differ by state.

1. Configure systems to collect tax correctly

• Apply correct taxability rules, taxability exemptions, and sourcing rules. Use an automated tax engine (Avalara, TaxJar, Sovos, Vertex) if you sell into many states.

1. Collect and remit

• File returns and remit tax on the schedule each state assigns (monthly, quarterly, or annually). Keep copies of exemption certificates and marketplace transaction reports.

1. Maintain records and monitor law changes

• Keep sales records, nexus analyses, and registration correspondence for at least three to seven years. States audit based on use tax assessments and nexus findings.

Marketplace facilitator rules — a critical simplifier and complication

Most U.S. states have passed marketplace facilitator laws requiring the marketplace to collect and remit sales tax on behalf of third‑party sellers. While this reduces a seller’s collection burden on marketplace sales, sellers must still monitor whether marketplace-collected tax covers all their channels and maintain records for reconciliation.

Common compliance mistakes and how to avoid them

• Treating all digital goods as uniformly exempt. Digital product taxability is state-specific.
• Waiting to register until after an audit. Register proactively once you meet nexus rules; retroactive registration can lead to penalties and interest.
• Misclassifying SaaS vs. licensed software. Misclassification can lead to under- or over-collection.
• Relying solely on marketplace collection without reconciling. Not all states apply marketplace laws uniformly.

Real-world example (anonymized)

A small publisher selling eBooks and online courses tracked $130,000 of annual sales across many states. After Wayfair thresholds were applied, the publisher triggered economic nexus in several states that use a $100,000 threshold. Registration and retroactive filings were required for two states where the seller had not collected tax. We registered the business with those states’ tax agencies (including the California Department of Tax and Fee Administration for CA) and set up automated collection, minimizing future risk. Proper documentation and timely voluntary disclosure programs limited penalties in negotiated settlements.

Tools and vendors

Consider sales tax automation software to keep rates, product taxability, and filing calendars current. Common providers include Avalara, TaxJar (now part of Stripe), Vertex, and Sovos. These tools reduce manual work and help apply sourcing rules consistently.

Practical checklist for sellers of digital products

• Perform a multistate nexus analysis at least annually.
• Map each product SKU to state tax rules and identify exemptions.
• Register in states where you meet nexus thresholds before collecting.
• Implement tax automation and test checkout scenarios.
• Retain exempt certificates and reconciliation reports.
• Revisit marketplace sales to confirm who remits tax.

Resources and authoritative references

• South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018).
• State tax agencies (e.g., California Department of Tax and Fee Administration — https://www.cdtfa.ca.gov) for state-specific guidance.
• Streamlined Sales Tax Governing Board (SST) for standardized rules among member states — https://www.streamlinedsalestax.org.
• Tax Foundation and Multistate Tax Commission summaries for state-by-state nexus thresholds and digital goods treatment.

Professional disclaimer

This article is educational and does not provide legal, tax, or accounting advice for specific situations. For tailored guidance, consult a qualified tax professional or state tax authority.

Where to get help at FinHelp

For related guidance on nexus and remote sales, see our articles “Understanding Nexus for SaaS and Digital Services” and “Nexus and Sales Tax for Remote Sellers After Wayfair.” For broader state nexus rules, see “State Nexus Rules: When Your Business Owes State Taxes.”

(Internal links: https://finhelp.io/glossary/understanding-nexus-for-saas-and-digital-services/, https://finhelp.io/glossary/nexus-and-sales-tax-for-remote-sellers-after-wayfair/, https://finhelp.io/glossary/state-nexus-rules-when-your-business-owes-state-taxes/)

If you maintain sales in multiple states or sell complex digital offerings, a proactive nexus review and automated tax collection are the most effective ways to reduce audit risk and penalties.