Sales of digital goods are taxed in most states and jurisdictions (table below). Here is what you need to know about sales tax if you sell digital goods in 2025.
Digital goods make up 3% of the US consumer’s wallet—a figure only set to grow.
This is an excellent opportunity for companies that want to reach people worldwide without worrying about shipping physical items.
But it also comes with a fresh tangle of tax issues.
The rise of digital goods has forced state governments to review their sales tax laws to account for products that don’t actually “exist” in real life.
In this guide, we’ll cover what defines a digital good, how they’re taxed across US states, and some best practices you can put in place to avoid hefty penalties.
What Are Digital Goods?
Digital goods are products you can’t physically touch or hold, but they still have value and can be bought and sold.
They’re delivered electronically, usually by downloading, streaming, or accessing them online. Think of them as the things you consume or use on a device rather than in the real world.
For example, digital goods include music tracks you download, ebooks you read on a tablet, apps you install on your phone, or even cloud-based software you subscribe to (like SaaS). Virtual items in video games, such as skins or in-game currency, are also considered digital goods. Basically, if it exists in the digital world and not your hands, it can probably be considered a digital good.
Here’s a list of things that can be considered digital goods:
- Music: like songs, albums, or playlists downloaded or streamed.
- Ebooks: digital books you read on devices like Kindles or tablets.
- Apps: mobile and desktop applications, from games to productivity tools.
- Digital Art: graphic designs, illustrations, or NFTs (non-fungible tokens).
- Cloud-based software (SaaS): subscriptions to tools like project management platforms, design software, or accounting programs.
- Video games: entire games or downloadable content (DLC).
- Online courses: educational content delivered through platforms or downloadable materials.
- Streaming media: movies, TV shows, or podcasts consumed via services like Netflix, Spotify, or YouTube.
- Stock media: Photos, videos, and audio files purchased for creative use.
- Licenses or keys: Digital rights to use software or media.
- Templates: Pre-designed files for websites, presentations, or documents.
- Web-based services: Premium features or content for subscription websites.
- Digital tickets: Access to events, webinars, or virtual experiences.
Laws Around Digital Goods Are Always Changing
Tax laws for digital products are in a constant state of flux.
What was true a year ago might already be outdated. Governments worldwide are trying to keep up with the digital economy, which means new rules and reinterpretations are popping up all the time. It can be a real headspin.
One major turning point in the US was the 2018 Wayfair vs. South Dakota Supreme Court case. Before this, online sellers only had to collect sales tax if they had a physical presence in a state. But the Wayfair decision allowed states to enforce sales tax on businesses based solely on economic activity—like a certain number of transactions or revenue thresholds—regardless of where the seller is physically located. This shift hit digital goods hard, with more states applying sales tax to items like ebooks, SaaS, and downloadables.
Since Wayfair, many states have broadened their definition of taxable digital products. For example, in 2023, Arkansas expanded its tax base to include digital goods like streaming services, digital books, and cloud-based software. Georgia followed suit by clarifying that their sales tax applies to digital goods delivered electronically, including everything from music downloads to online courses.
Maryland made waves in 2021 by implementing the first-ever digital advertising tax in the US, showing how states are exploring new ways to tax digital commerce.
Digital Products, Defined
The term “digital products” is often used to describe anything you can buy or use online. Here’s some more clarification.
Downloads vs. Digital Products Accessed Online
When you buy and download an ebook to your Kindle, that's different from reading it through a browser-based subscription service like Scribd.
While both give you access to the same content, states often have different tax requirements for them. Downloaded products are typically considered “tangible personal property”, just in digital form. Online access, including cloud-based software and streaming services, is usually treated as a service rather than a product.
For example, if you buy Microsoft Office as a one-time download, that's different from subscribing to Microsoft 365 online. Some states tax these differently, even though you're essentially getting the same tools. Connecticut, for instance, taxes downloaded software at their regular sales tax rate but applies a different rate to cloud-based software services.
The main difference here is how the buyer uses the product. Downloaded goods are typically permanent, while online-access products often involve subscriptions or temporary access.
Physical Property v. Digital Downloads
The difference between physical property and digital downloads comes down to how the product is delivered and consumed.
Physical property includes tangible items you can hold, like books, CDs, or DVDs. Digital downloads, on the other hand, are intangible products delivered electronically, like e-books, MP3s, or streaming movies. Even though the content might be the same—a book in print vs. an e-book—the way it’s taxed often varies, with digital downloads subject to entirely different rules in many places.
Products that are Normally Tax Exempt in Non-Digital Format
Then there’s the tricky category of products that are normally tax-exempt in non-digital formats.
In many states, a physical textbook may be tax-exempt because it's considered educational material. But what happens when you buy the exact same textbook as a PDF? This is where things get interesting. Some states have the same exemptions for digital versions, while others treat them as completely different products subject to tax.
Take newspapers as another example. In New York, printed newspapers are tax-exempt, but digital subscriptions are taxable. Meanwhile, states like Florida treat digital newspapers the same as their paper counterparts - both are tax-exempt.
The Streamlined Sales Tax Standard (SST)
To help make sense of all this, the SST Agreement gives a standard definition of digital products that many states follow. Under SST, digital products fall into three main categories:
- Digital audio-visual works (like movies and shows)
- Digital audio works (like music and audiobooks)
- Digital books (like ebooks and digital magazines)
But here's the catch—even states that follow SST can still make their own rules about taxing these products. For instance, while SST defines an ebook as a digital product, member states can choose whether to tax it or not.
State By State Information
Know Your Nexus
Nexus helps you figure out when to collect sales tax in different states. This can be especially tricky with digital products, as they're sold everywhere without any physical presence.
Physical Nexus: The Traditional Approach
Think of physical nexus as having a real-world footprint in a state. You create a physical nexus when you:
- Have an office or store, even if it's just a small workspace
- Store inventory, including using Amazon FBA warehouses
- Have employees working in the state, even remotely
- Regularly attend trade shows or events in the state
- Use your own vehicles for deliveries in the state
Even something as simple as having one remote employee working from home in another state can trigger a physical nexus there. For digital products, this means if you're a software company in California but have a developer working remotely from Colorado, you might need to collect Colorado sales tax on your digital sales.
Economic Nexus: The New Way of Doing Things
After the Wayfair decision in 2018, states started focusing more on economic nexus. Instead of physical presence, it's more about your sales volume. Every state sets its own thresholds, but here's what it typically looks like:
- Sales revenue threshold (usually $100,000 per year) OR
- Number of transactions (often 200 transactions)
Here's where it gets interesting for digital products. These thresholds include all sales, not just taxable ones. So even if your state doesn't tax digital downloads, those sales still count toward your economic nexus threshold.
Here’s an example of how you might trigger economic nexus:
- You sell digital courses from your home office in Texas
- Your annual sales in South Dakota hit $120,000
- Even though you never set foot in South Dakota, you now have nexus there and need to collect South Dakota sales tax
State-Specific Quirks
Each state has its own twist on nexus rules.
For instance:
- Kansas has no minimum threshold for sellers with physical nexus
- Some states like Oklahoma only look at sales volume, not transaction counts
- New York considers having a virtual mailbox in their state as physical nexus
Digital Products and Nexus
Nexus gets extra complicated when you’re selling digital products because:
- You might hit transaction thresholds quickly with low-priced downloads
- Different states categorize digital products differently
- Some states have special rules for marketplace sales of digital goods
For example, if you sell $2.99 ebooks, you could hit 200 transactions in a state long before reaching $100,000 in sales. In that case, you'd still need to register and collect tax, even though your revenue is relatively low.
Best Practices for Handling Sales Tax on Digital Goods
Yes, it’s tricky, but it’s also necessary. Here are some tips for staying on top of your filing commitments.
Keep Accurate Sales Records
Good record-keeping is your first line of defense. At the bare minimum, you’ll want to maintain:
- Detailed transaction records for each sale, including the customer's location
- Proof of customer location (IP addresses, billing addresses, credit card information)
- Copies of all tax exemption certificates
- Documentation of how you determined taxability for each product
- Records of marketplace vs. direct sales
- Screenshots of your tax collection process and customer notifications
During a sales tax audit, states often look specifically at digital goods because they're harder to track. Having clear records showing why you did or didn't collect tax on each sale can save you thousands in penalties.
Clearly Display Tax to Customers
Make sure your pricing is transparent by either including sales tax in the listed price or clearly showing it as a separate line item.
You can go one step further in the name of transparency and:
- Show tax calculations before the final checkout step
- Clearly separate tax from the product price
- Include notices about tax rates varying by location
- Explain why tax is being charged on digital products (many customers don't expect it)
File and Remit Sales Tax on Time
Missing a tax filing deadline can lead to fines, penalties, and a big headache. Stay on top of your filing schedule by setting reminders or using software that automates the process. Filing late doesn’t just cost you money. It can also erode your credibility with tax authorities, which can increase your chances of getting audited in the future.
Take Advantage of Tax Automation Software
If you’re selling across multiple states or countries, automation software can be a lifesaver. Tools like Numeral calculate the correct rate for each transaction, file returns, and even help you register in new jurisdictions. These platforms can save you hours of manual work and make sure you’re always compliant with the latest rules.
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Don’t Forget to File
Digital goods may be intangible, but the rules surrounding them are very real. Failing to file where you need to and collect tax on the right products can leave you in hot water with some pretty hefty penalties to pay.
Using the right tools can make a huge difference. Dedicated tax platforms like Numeral help you collect and file the right amount of sales tax in every state you have nexus.
Yes, compliance is complicated, but it doesn’t have to be a huge burden. With the right approach, it can be just another part of running a smooth, successful operation.
