State by state guide to the taxability of digital products

This guide to sales tax on digital products by state has been updated to reflect new state policies. It was originally published in February 2019.

Determining the taxability of digital goods can be challenging for businesses. Most of us engage in many activities online, using software, reading ebooks, or streaming digital media for hours each day. Yet some states still haven't clearly defined how sales and use tax applies to digital goods and services.

To help you better understand digital products sales tax, this blog will explain:

• How do you define digital products for sales tax?
• How do you figure out sales tax on digital products by state?
• What is the sales tax on digital goods by state?
  • States that generally tax digital goods
  • States that generally exempt digital goods
• How do you source sales of digital products?

How do you define digital products for sales tax?

When you're selling digital products, you need to understand how states define digital goods for sales tax. Unfortunately, there's no single governing legal definition.

Digital content often doesn't fit tidily into state sales tax definitions because most sales tax laws were created before such products were even conceived. All states with a sales tax apply it to most "tangible personal property" - but an ebook can't be held like a physical book, and a streamed movie can't be grasped like a DVD.

Nonetheless, some states have tried to make existing laws fit newer products. Some don't tax digital products because they're intangible, while others treat intangible goods as taxable tangible personal property because they can be seen or experienced.

Some states use existing laws as guidelines: If a product is taxable in its tangible form, then it's taxable in its intangible form. Other states have added new definitions to their tax laws and specified how sales tax applies to certain digital goods.

The 24 states that are members of the Streamlined Sales and Use Tax Agreement (SSUTA, or SST states) must adhere to a standardized definition for certain electronically transferred products. "Specified digital products," include digital audio works, digital audiovisual works, and digital books. Yet these are merely standardized definitions: SST states can tax or exempt digital products as they see fit.

Unfortunately, some states have not updated their tax laws or guidelines to address digital products sales tax; taxpayers must make the best of existing laws.

How do you figure out sales tax on digital goods by state?

Figuring out the taxability of a digital product typically requires scouring state statutes, department of revenue websites, and other resources. Bring your patience - you'll need it.

Guidance can sometimes be found in department of revenue letter rulings, in which the tax authorities answer questions from specific taxpayers. "A letter ruling is binding on the state but often only for the company that asked for the ruling," explains Scott Peterson, Vice President of Government Relations at Avalara. "The ruling very likely would apply to any other company with identical facts, but the state gets to decide if the facts are identical."

Consider this blog post as a cheat sheet to help you determine the taxability of the digital goods you sell. Since it's not possible to cover the taxability of every different electronically transferred transaction here, we're focusing on how sales and use tax applies to retail sales of:

• Digital audio files (such as music, podcasts, and ringtones)
• Digital books (ebooks, magazines, newspapers)
• Streaming services (such as digital audiovisual works like television shows and movies)

Use the information below as a starting point, not tax advice. Taxability often hinges on a variety of factors, such as the identity of the consumer (e.g., B2B transactions may be taxed differently from B2C transactions), or whether a digital good is transferred in conjunction with a physical storage device. There are often exceptions to taxability rules, especially where digital goods are concerned. And, of course, sales and use tax laws are subject to change at any time.

What is the sales tax on digital goods by state?

States that generally tax digital goods

• Alabama. Retail sales of photographs, blueprints, and other similar articles are subject to sales or use tax, as is computer software. Alabama law doesn't address other digital products, but departmental guidance states, "The form in which tangible property is delivered by the seller to the purchaser is of no consequence."

• Arizona. "Tangible personal property" means personal property that may be seen, weighed, measured, felt, or touched or that is in any other manner perceptible to the senses. The Arizona Department of Revenue generally treats digital goods and software as taxable.

• Arkansas. Digital products are generally taxable.

• Colorado. Digital products are generally taxable, though electronically delivered software is exempt.

• Connecticut. The sales and use tax rate for digital goods and electronically accessed or transferred canned or prewritten software sold for personal use is subject to the standard 6.35% rate as of October 1, 2019; electronically accessed or transferred canned or prewritten software sold to a business for business use is subject to a reduced rate of 1%.

• Georgia. Sales of specified digital products, other digital goods, and digital codes sold to an end user in the state are subject to Georgia sales and use tax as of January 1, 2024, provided the end user receives the right of permanent use of the products and the transaction isn't conditioned upon continued payment by the end user.

• Hawaii. Digital products are subject to Hawaii's general excise tax, or GET.

• Idaho. Digital music, digital books, digital videos, and digital games are taxable regardless of the delivery or access method but only if the buyer has a permanent right to use them. Leases or rentals of these digital products are not taxable, nor are digital subscriptions. Other information stored in an electronic medium is taxable tangible personal property only if transferred to the user on storage media that is retained by the user. Photographs delivered electronically are exempt.

• Indiana. Specified digital products are taxable when the end user has the right of permanent use that's not conditioned upon continued payment. A digital code that may be used to obtain a product transferred electronically is taxed in the same manner as the product. Digital photographs are exempt.

• Iowa. Digital products, including images and electronic games, are generally taxable unless purchased by a commercial enterprise and used exclusively by or furnished to that commercial enterprise. Fun fact, when Iowa lawmakers grant an exemption for an entity, they also need to establish an exemption for digital goods sold to that entity.

• Kentucky. Digital property, including digital photographs and video games, is generally taxable; see also the Kentucky Department of Revenue.

• Louisiana. The sale or use of a downloaded digital product such as music, a movie, book, or game is a taxable transaction. See also the Fiscal Note for 2023 HB 642.

• Maine. Products transferred electronically are subject to retail sales tax.

• Maryland. Digital products and digital codes are subject to Maryland sales and use tax as of March 14, 2021.

• Minnesota. Specified digital products, other digital products (including online video and computer gaming), and digital codes are taxable. However, digital photographs and drawings are exempt, as are charts and graphs, data or financial reports, and access to digital news articles.

• Mississippi. Specified digital products (including digital photographs) are generally subject to Mississippi sales and use tax. Digital codes that allow the purchaser to obtain a digital product are taxed in the same manner as the digital product.

• Nebraska. Digital audio works, digital audiovisual works, digital books, and digital codes are generally taxable.

• New Jersey. Specified digital products are generally subject to New Jersey sales and use tax, as are receipts for installing, maintaining, servicing, or repairing specified digital products.

• New Mexico. Digital goods are generally subject to New Mexico gross receipts tax. See additional information on sales tax sourcing rules.

• North Carolina. Sales and use tax applies to digital audio works, audiovisual works, books, greeting cards, photographs, and publications (e.g., magazines, newspapers, newsletters, reports). The tax applies whether the purchaser has the right to use the digital goods permanently or to use it without making continued payments.

• Ohio. Specified digital products are taxable whether rented or owned.

• Pennsylvania. The commonwealth's 6% sales and use tax applies to the purchase of digital products delivered to a customer electronically, digitally, or by streaming.

• Rhode Island. Specified digital products are subject to Rhode Island sales and use tax as of October 1, 2019. Taxable products include digital movies, digital TV shows, digital books, digital music, and related items that are streamed or downloaded to computers, phones, or other devices, as well as subscriptions to streaming audio and streaming visual products.

• South Dakota. Products transferred electronically are subject to sales and use tax in South Dakota. If there is no delivery or customer address on file, sales tax applies based on where the product is first available for transmission by the seller.

• Tennessee. The sale, lease, licensing, and use of specified digital products (digital audio works, audiovisual works, and books) are subject to Tennessee sales tax, as is final artwork delivered in digital form. However, digital photographs are exempt.

• Texas. Digital goods are taxable in Texas when the items would be taxable if delivered in physical form. Per Texas Code Sec. 151.010, the sale or use of a taxable item in electronic form instead of on physical media does not alter the item's tax status.

• Utah. Products transferred electronically are subject to Utah sales tax.

• Vermont. Digital downloads, including remotely accessed prewritten software, are generally taxable. Digital videos are also taxable, but digital photographs are exempt.

• Washington. Sales and use tax applies to all digital products, regardless of how they're accessed or whether the purchaser obtains a permanent or nonpermanent right of use.

• Wisconsin. Wisconsin sales and use tax generally applies to the sales of and the storage, use, or other consumption in Wisconsin of "specified digital goods," "additional digital goods," and "digital codes." However, specified digital goods are exempt if the sale of such goods in tangible form is exempt.

• Wyoming. Digital products and digital codes delivered electronically are subject to Wyoming sales tax when transferred to the purchaser for permanent use. Digital products include but aren't limited to software, music, video, reading materials, or ringtones.

• Washington, D.C. Sales tax applies to digital audiovisual works, digital audio works, digital books, digital codes, digital applications and games, and any other otherwise taxable tangible personal property electronically or digitally delivered, whether electronically or digitally delivered, streamed, or accessed and whether purchased singly, by subscription, or in any other manner, including maintenance, updates, and support.

States that generally exempt digital goods

• Alaska. There is no state sales tax in Alaska. Local taxes may apply in some jurisdictions.

• California. The sale of electronic data products such as software, data, ebooks, mobile applications, and digital images are generally not taxable when the data is transmitted to customers over the internet. However, if the sale includes a printed copy of the electronically transferred information or a backup data copy on a physical storage medium, such as a flash drive, the entire sale is usually taxable. A local utility users tax may apply to streaming services.

• Delaware. There is no general sales tax in Delaware.

• Florida. Digital goods are not considered "tangible personal property" and so are not subject to Florida sales or use tax. However, video, direct-to-home satellite, and related services (including voice, data, audio, or any other information or signals transmitted by any medium) are subject to Florida communications services tax, or CST.

• Illinois. Per 86 Ill. Adm. Code 130.2105(a)(3), information or data that's downloaded electronically (e.g., downloaded books, musical recordings, newspapers, or magazines) do not constitute the transfer of tangible personal property and are not subject to Illinois sales and use tax. However, the Chicago amusement tax applies to streaming services in Chicago.

• Kansas. Kansas does not tax specified digital products and has not adopted any of the SST-specified digital products definitions.

• Massachusetts. Other than software, digital products such as music, video, and reading material are not subject to tax when delivered electronically.

• Michigan. A digital good that doesn't fall within the definition of "prewritten computer software" is not subject to sales tax or use tax regardless of whether it's downloaded, streamed, or accessed through a subscription service. Digital games are considered software and generally taxable if downloaded or otherwise installed onto electronic devices.

• Missouri. The state hasn't specifically addressed the taxability of digital products, but a letter ruling issued by the Missouri Department of Revenue in June 2023 explains that digital music, interactive computer services, and signature subscription services are not taxable.

• Montana. There's no general sales tax in Montana.

• Nevada. Specified digital products are not considered tangible personal property in Nevada and are not subject to sales and use tax.

• New Hampshire. There's no general sales tax in New Hampshire.

• New York. Digital products that are taxable when sold in tangible form (e.g., ebooks, games, movies, and music) are not subject to New York sales and use tax when transmitted electronically. Yet prewritten computer software, including downloadable prewritten computer gaming software, is generally taxable.

• North Dakota. Specified digital products are generally exempt from North Dakota sales tax (see 57-39.2-04: Exemptions).

• Oklahoma. Sales of digital products delivered electronically including music, video, ringtones, and books, are not subject to Oklahoma sales and use tax (see Okla. Admin. Code § 710:65-19-156).

• Oregon. There's no general sales tax in Oregon.

• South Carolina. Software delivered by electronic means is not subject to tax in South Carolina, provided no part of the software is delivered by tangible means. However, cloud-based services and streaming services are subject to South Carolina sales tax.

• Virginia. Digital products delivered electronically (e.g., software, downloaded music, ringtones, and reading materials) are exempt from Virginia sales and use tax. In 2024, a bill seeking to tax digital goods failed to become law.

• West Virginia. Specified digital products are not subject to West Virginia sales and use tax. However, streaming services are taxable. See also the West Virginia Tax Division, TSD 445.

How do you source sales of digital products?

Where digital goods and services are subject to sales tax, retailers and digital goods marketplaces need to know how to source each transaction. Sourcing sales of electronically transferred products can be more complicated than sourcing sales of tangible goods because of the nature of digital goods. A resident of Texas can easily purchase and download a digital book while vacationing in Hawaii or Maine. A resident of Washington state may stream a movie from a hotel in Chicago or an apartment in Massachusetts.

For the most part, sales of digital products follow destination sourcing rules, either the location where the buyer first makes use of a product or the buyer's billing address. Yet this presumes the seller knows the location of first use or the billing address of the buyer, which isn't always the case with digital products. The fact that multiple users can access a digital product simultaneously is another challenge.

Technology is constantly evolving, and products sold today don't always fit neatly into laws made yesterday. To determine the actual taxability of products you sell or lease, consult with a tax professional or the state tax authorities. Using tax automation software can also help make sure you collect and remit sales and use tax as required.

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