Overview
State sales tax on digital goods is not uniform. Since the U.S. Supreme Court’s 2018 decision in South Dakota v. Wayfair, Inc., states have broader authority to require out‑of‑state sellers to collect sales tax if they meet economic nexus thresholds. But whether a particular digital product is taxable still depends on each state’s laws and guidance. Some states treat many digital items like tangible personal property or taxable services, while others exempt them or haven’t clearly addressed them.
Common categories of digital goods and how states typically treat them
-
Digital downloads (music, movies, e‑books, software downloads): Many states treat permanently downloaded files similarly to tangible goods and tax them, especially when prewritten (“canned”) software is downloaded. States that tax tangible personal property often extend that rule to digital transfers that give buyers a permanent copy.
-
Streaming (on‑demand audio, video, live events): Streaming is more frequently treated differently from downloads. Several states exempt streaming or tax it only when access confers permanent ownership. As a practical matter, streaming subscriptions are often treated like a service, and whether that service is taxable varies by state.
-
Software as a Service (SaaS) and cloud services: Tax treatment of SaaS is one of the most contested areas. Some states tax SaaS as a taxable service or as a substitute for prewritten software; others exclude it. The practical consequence is that a single SaaS product can be taxed in one state and exempt in another.
-
In‑app purchases, virtual goods, and microtransactions: States are increasingly clarifying how in‑app purchases and virtual items are taxed. When the purchase conveys a right to download or permanently own content—or is considered taxable personal property—states are more likely to impose tax.
-
Subscriptions and bundled digital/physical sales: If a purchase mixes taxable physical goods with digital goods, states use allocation rules or treat the bundle according to the dominant component. Subscription models can complicate sourcing and nexus calculations.
Key legal and practical drivers
-
Economic nexus and Wayfair: After Wayfair, nearly every state that imposes a sales tax has an economic nexus rule based on remote sales thresholds (often $100,000 in sales or a set number of transactions, such as 200). These thresholds determine when an out‑of‑state seller must register and collect tax. South Dakota’s threshold (used in the Wayfair case) was $100,000 in sales or 200 transactions.
-
Marketplace facilitator laws: As of 2025 many states require marketplace facilitators (like app stores or digital marketplaces) to collect and remit tax on third‑party sales. This shifts the compliance burden from many small sellers to the platform.
-
Sourcing rules (destination vs. origin): States determine which tax rate applies based on sourcing rules. Most states use destination‑based sourcing for sales tax (tax rate where the buyer receives the product), which affects remote sellers of digital goods.
-
Use tax: If sales tax wasn’t collected at purchase, the buyer may owe use tax to their state. States aggressively promote use tax compliance, especially for high‑value digital subscriptions and software.
Exemptions and special cases
-
Educational, government, and nonprofit exemptions: Purchases made by exempt entities or for exempt purposes may be non‑taxable, but certificates and documentation requirements vary by state.
-
Resale and manufacturing exemptions: If the digital good is bought for resale or as an input to manufacturing a taxable product, a resale or production exemption may apply; sellers must collect valid resale certificates.
-
Free trials and bundled pricing: States differ on whether a free trial becomes taxable when converted to a paid subscription or whether an otherwise taxable item bundled with non‑taxable services is taxed in full.
Practical compliance steps for businesses
-
Inventory your digital products and map them to state tax rules. List downloads, streaming, SaaS, in‑app sales, and mixed bundles so you can analyze taxability by state.
-
Determine where you have nexus. Check each state’s economic (and physical) nexus rules. Many states publish guidance with their thresholds and rules; use state Department of Revenue websites.
-
Check marketplace facilitator rules. If you sell through platforms, confirm whether the platform collects tax or you must. Marketplace rules vary and can change annually.
-
Register, collect, and remit where required. If you meet a state’s nexus and the product is taxable there, register for a sales tax permit and begin collecting the correct rate, including local add-ons.
-
Decide sourcing method and rates. Apply state sourcing rules to determine which jurisdiction’s rate to charge. Most states use destination‑based sourcing for digital goods.
-
Keep documentation and exemption certificates. Save resale and exemption certificates, invoices, and nexus analyses to substantiate filings in case of audit.
-
Use automation tools. Most sellers of digital goods find tax engines or sales tax automation software (e.g., Avalara, TaxJar) helpful because they update taxability rules, rates, and register marketplaces.
What consumers should know
-
You may pay sales tax at checkout for some digital purchases, depending on the seller’s location, platform rules, and your state’s laws.
-
If a seller didn’t collect sales tax, you may still owe use tax to your state. Many states include a checkbox or use tax reporting on income tax forms, but consumers rarely face enforcement unless the amounts are substantial.
-
If you buy through a marketplace and see tax collected, the marketplace often remits it on your behalf.
Where to find definitive answers
-
State revenue department websites provide current guidance and rate lookups. Because digital tax law changes frequently, consult the state’s published rules or directive.
-
For background on how states generally approach sales tax and nexus, see our FinHelp guide “A guide to state sales tax” (https://finhelp.io/glossary/a-guide-to-state-sales-tax/) and “How do states handle sales tax on online purchases?” (https://finhelp.io/glossary/how-do-states-handle-sales-tax-on-online-purchases/).
-
Multistate resources such as the Streamlined Sales Tax Governing Board offer model definitions and resources that some states follow; see the Streamlined Sales and Use Tax website for more (https://www.streamlinedsalestax.org).
Final checklist for sellers (quick reference)
- Identify product types and active states.
- Confirm economic nexus thresholds and marketplace rules.
- Register where required and collect sales tax correctly (sourcing, rate, exemptions).
- Automate rate and filing where possible.
- Keep records and review taxability annually.
Bottom line
State sales tax on digital goods is a moving target. Sellers of downloads, streaming subscriptions, SaaS, and in‑app goods should regularly review state guidance and consider tax automation to manage compliance. Consumers should expect more states to clarify digital tax rules over time and may owe use tax if sellers don’t collect.
Authority and further reading
- Supreme Court, South Dakota v. Wayfair, Inc., 585 U.S. ___ (2018).
- Streamlined Sales and Use Tax Governing Board: https://www.streamlinedsalestax.org
- FinHelp glossary: “A guide to state sales tax” and “How do states handle sales tax on online purchases?”
(If you’d like, I can add a state‑by‑state table that summarizes current taxability for common digital goods as of 2025. That table would require state‑level citations and might need periodic updates.)