Why sales tax compliance for digital goods matters

States intensified enforcement after the U.S. Supreme Court’s 2018 South Dakota v. Wayfair decision, which allowed states to require remote sellers to collect sales tax based on economic presence. That means many digital sellers now face multi‑state obligations; missing registrations or incorrect taxability treatment can trigger back taxes, penalties, and interest. For an overview of state rules, see the National Conference of State Legislatures (NCSL) and state department of revenue sites (e.g., NCSL: https://www.ncsl.org).

Six best practices (actionable checklist)

  1. Map product taxability first
  • Create a taxability matrix that lists every digital product (e.g., e-book, downloadable music, SaaS, one‑time digital asset) and notes whether each state taxes it. Taxability varies by product and by state. Use authoritative state guidance and commercial tools to confirm.
  1. Run a nexus and registration review regularly
  • Economic nexus thresholds and triggers differ by state. Many states use thresholds like $100,000 in sales or 200 transactions, but rules change—verify each state’s law before assuming you’re exempt. When thresholds are exceeded, register and obtain a sales tax permit promptly to limit exposure.
  1. Automate collection and tax calculation
  • Integrate a sales tax engine (TaxJar, Avalara, etc.) with your platform to apply the correct rate and product taxability at checkout. Automation reduces calculation errors and simplifies reporting; still periodically audit automation settings against source rules.
  1. Collect and store exemption certificates correctly
  • For B2B sales or exempt buyers, collect valid exemption certificates and retain them in a searchable format. States often require specific certificate forms or information; keep originals for the typical six‑year audit window.
  1. Reconcile and remit on schedule
  • Maintain a filing calendar for each state where you have a permit. Reconcile collected taxes monthly/quarterly against remitted amounts. If you discover prior under‑collection, consult a tax advisor about voluntary disclosure programs to reduce penalties.
  1. Prepare for audits and keep clean records
  • Retain sales invoices, IP lookup results, exemption certificates, and nexus determinations for several years. Document your methodology for product classification and tax rate sourcing so you can demonstrate a reasonable compliance process during audits.

Practical implementation tips from practice

In my experience working with digital vendors, the fastest compliance gains come from (a) building a single source of truth for product definitions, and (b) testing checkout flows for tax behavior before scaling into new states. I’ve seen sellers lower audit risk simply by standardizing SKU-level taxability and applying a consistent exemption‑certificate capture workflow.

Common mistakes to avoid

  • Assuming all digital goods are tax exempt. Tax treatment is state-specific. (NCSL and state statutes clarify this.)
  • Waiting to register until after receiving an audit notice. Late registration often increases penalties.
  • Relying solely on marketplace platforms without confirming who legally remits tax; marketplace facilitator laws shift responsibility in many states.

Short examples

  • E‑book publisher: must track buyer locations and charge tax only in states that tax digital books; where exempt, retain buyer location evidence.
  • SaaS vendor: may be taxable as a service or as tangible personal property depending on the state—classify consistently and document the basis.

Authoritative sources: NCSL (https://www.ncsl.org), Streamlined Sales Tax Governing Board (https://www.streamlinedsalestax.org), TaxJar (https://www.taxjar.com). Use state department of revenue pages for the final word on taxability.

Quick FAQ

  • Which states can require collection? Any state where you meet nexus criteria under its law. See NCSL for summaries.
  • How long keep records? Commonly six years; check state law and your accountant’s guidance.

Professional disclaimer
This information is educational and current as of 2025 but not personalized tax advice. For firm-specific strategy or representations before a state revenue agency, consult a licensed CPA or state tax attorney.

Suggested next steps

  1. Run a nexus report for the prior 12 months. 2. Build or update your product taxability matrix. 3. Pick and test a tax automation provider integrated with your checkout. 4. Schedule a review with a sales tax specialist before expanding into new states.