The internet can be a great way to sell your products. For tangible products it’s easy - the order comes in, you process the payment (including sales tax, which you collect and remit to the state) and ship out the package. But what if what you’re selling isn’t a physical product that you ship?
Generally, digital products are “intangible” and sent to your customers electronically. These products can include digital books, music, internet TV and streaming media, webinars, subscriptions, software and apps, among many other products.
Is the sales tax process the same for these products? Are they even taxable?
Attempts to Standardize the Taxation of Digital Goods and Services
The U.S. has no uniform sales tax on digital items, though periodically there are attempts to firm up guidelines, such as the “Digital Goods and Services Tax Fairness Act of 2018” which failed to progress through the legislative branch. Federal regulation regarding digital sales nationwide generally attempts to pin down the appropriate tax jurisdiction – location of the sale, of the seller, of the consumer and so on – as well as the tax rate.
“There is substantial risk that without a national framework, multiple states and localities will claim they have authority to tax the same digital transaction,” reads the primer for the “Digital Goods and Services Tax Fairness Act of 2019,” sponsored by Sen. John Thune (R-SD) and Sen. Ron Wyden (D-OR) which also failed to make it through the legislative branch.
For now, each state and certain local jurisdictions decide what sales tax to charge, including on remote sellers and businesses where they have nexus.
States go their own way
Much like how states determine their own economic nexus thresholds, states tackle digital goods and services in a dizzying number of ways as well.
Slightly more than half the states tax sales of digital products.Some states, like Minnesota, exempt certain digital products. Wisconsin exempts seminars. They don’t like to make things simple if you couldn’t tell.
Some states tax ringtones as digital products and some don’t. North Carolina imposes tax on sales of e-delivered greeting cards and photographs. Nebraska taxes sales of “content cards” or “digital release cards” that allow purchasers to download specific digital goods if the product is taxable in other circumstances.
Some states like Alaska don’t have a general sales tax at all, but in that state localities are banding together to impose sales tax on products sold over the internet.
Connecticut recently hiked its sales-tax rate from 1% to 6.35% on most digital goods sold to consumers while maintaining the reduced rate of 1% when sold to businesses.
Some states have no definition of “digital” product or goods. Others use the Streamlined Sales Tax definition from the Streamlined Sales Tax Governing Board.
Still other states have their own definitions and conditions of taxability of digital products. In Indiana, “specified digital products” includes digital audio works, digital audiovisual works, and digital books electronically transferred.
Keeping up with all the different rules is not an easy task – and the consequences of non-compliance can be severe. State departments of taxation and revenue are good sources of information for the latest digital taxation developments. The Federation of Tax Administrators also provides updates.
You’ll have your work cut out for you: Between definitions, rate changes and the explosion of digital products, this area of sales and use tax can easily take a lot of attention.
We can help you stay on top of this ever-changing environment. TaxConnex is an outsourced sales department that can take the burden of sales tax off your plate. Contact us to learn what it means when sales tax is all on us.