Do you have to pay Sales Tax on the sale of digital products and services in America, such as streaming music, videos, podcasts, software, and ebooks?
Sales Tax regulation continues to adjust following the landmark 2016 ruling that dramatically changed this type of indirect taxation in the United States
Among American states, there is no single definition of digital product for Sales Tax purposes. The common characteristic is that they are goods not sold on physical media [such as a DVD]. We can divide the American states into three categories based on the type of definition adopted to identify digital products. Defining what is meant by "digital product" is the first step in understanding what taxation to apply. Currently, here is the situation:
- States that specifically define digital products and services through the adoption of the SST legislation model [Streamlined Sales Tax: a consortium of states that have adopted common procedures to simplify Sales Tax management]
- States that define digital products through their own laws, regulations, or informational documents, often relating them to other categories of taxable products.
- States that have not adopted a definition of digital product for Sales Tax purposes.
The 12 States Using the SST Definition of Digital Product for Sales Tax Payment
- Indiana
- Kentucky
- New Jersey
- Nebraska
- Nevada
- North Dakota
- Rhode Island
- Tennessee
- Vermont
- Washington
- Wisconsin
- Wyoming
List of 16 States Adopting Their Own Definition of Digital Product for Sales Tax Payment
- Arkansas is an SST member state that defines two categories of digital products: "Digital Audiovisual Works" and "Digital Audio Works".
- Connecticut defines digital products in its telecommunications services law section. It should be noted that the law specifically omits digital products from the telecommunications services category, but the definition is useful. Connecticut law states "digital products delivered electronically, including, but not limited to, software, music, videos, reading material, or ringtones".
- Georgia
- Iowa defines digital products as: "Sales of items delivered digitally or electronically and include art, drawings, photographs, music, e-greeting cards, software, movies, concerts, books, and television and radio programs not sold on physical media and all other digitized products"
- Illinois defines digital products as books downloaded online, music recordings, newspapers, or magazines.
- Kansas defines digital products in its telecommunications services law section.
- Louisiana
- Michigan defines digital products in its telecommunications services law section.
- Minnesota. For sales tax purposes, Minnesota law defines digital products delivered electronically, including, as an example but not exhaustive, software, music, videos, reading material, or ringtones.
- Maine
- Mississippi is not an SST member, but the state uses a similar definition structure for digital products as SST: Digital products mean digitally transferred audiovisual works, digital audio works, and digital books.
- In North Carolina, digital property includes items delivered or accessed electronically "an audio work; an audiovisual work; a book, magazine, newspaper, newsletter, report, or other publication; or a photograph".
- Ohio. Ohio's Sales Tax standards describe digital products as those delivered electronically, including software, music, videos, reading material, or ringtones
- Oklahoma defines digital products as: products delivered electronically and that include music, videos, ringtones, and books.
- Texas for sales tax purposes defines digital products as tangible property. Digital products, like photographs and music, are personal tangible products as defined in section 151.009 of the Texas tax code.
- West Virginia. The definition of digital products identifies them as those delivered electronically, including, but not limited to, software, music, videos, reading material, or ringtones.
States That Have Not Adopted a Specific Definition of Digital Products or Services for Sales Tax Payment
Here are the 18 states that fall into this category:
- Alabama's law does not specifically define digital products for sales tax purposes. In Alabama, tangible property is described as "personal property that ... is in some manner perceptible to the senses".
- In Arizona, tangible property is described as "personal property that ... is in some manner perceptible to the senses.
- California does not specifically define digital products for sales tax purposes.
- Colorado
- District of Columbia
- Florida
- Hawaii
- Idaho
- Maryland
- Massachusetts
- Missouri
- New Mexico
- New York
- Pennsylvania
- South Carolina
- South Dakota
- Utah
- Virginia
State-by-State List of Sales Tax Exemptions for Digital Products
- Alabama - YES
- Alaska - NO
- Arizona - YES
- Arkansas - NO
- California - NO
- Colorado - YES
- Connecticut - YES
- Delaware - NO
- Florida - NO
- Georgia - NO
- Hawaii - YES
- Idaho - YES
- Illinois - NO
- Indiana - YES
- Iowa - YES
- Kansas - NO
- Kentucky - YES
- Louisiana - YES
- Maine - YES
- Maryland - NO
- Massachusetts - NO
- Michigan - NO
- Minnesota - YES
- Mississippi - YES
- Missouri - NO
- Montana - NO
- Nebraska - YES
- Nevada - NO
- New Hampshire - NO
- New Jersey - YES
- New Mexico - YES
- New York - NO
- North Carolina - YES
- North Dakota - NO
- Ohio - YES
- Oklahoma - NO
- Oregon - NO
- Pennsylvania - YES
- Rhode Isl - NO
- South Carolina - YES
- South Dakota - YES
- Tennessee - YES
- Texas - YES
- Utah - YES
- Vermont - YES
- Virginia - NO
- Washington - YES
- Washington DC - YES
- West Virginia - NO
- Wisconsin - YES
- Wyoming - YES
Sales Tax on Digital Services Taxed at a 3% Rate
Maryland recently expanded the application of sales tax to a range of digital services at a 3% rate. The new regulation is effective from July 1, 2025. We fully report what is provided in Maryland by the new standards on sales tax for digital services because we believe it clearly represents the evolution in the application of sales tax in the digital services sector.
The 3% sales tax applies to services that match the activity descriptions contained in the following NAICS codes:
- Data Processing, Hosting, and Related Services (NAICS 518) – including cloud computing, data storage, and web hosting;
- Other Information Services (NAICS 519) – including certain information services activities and search portal services;
- Computer Systems Design and Related Services (NAICS 5415) – including software development, systems integration, IT consulting, and many IT security services;
- Software Publishing Services (NAICS 5132) – for both system and application software.
It is important to note that even a business adopting a different NAICS classification than 518, 519, 5415, or 5132 for tax or other purposes, but which sells a service related to the activities described by these codes, is still required to collect and remit sales tax on the sale. Additionally, there is no exemption provided for sales made to affiliated companies.
Sales Tax on Online Advertising and Digital Marketing Services
Generally, these services fall under NAICS classification 5418 and are not within the scope of this new 3% sales tax rate on digital services. Maryland's digital advertising gross revenue tax, in fact, imposes different sales tax rates under a separate tax.
Sales Tax on SaaS Services
SaaS meets the definitions of both digital product and software publishing service. SaaS intended for business use (used exclusively within an enterprise computing system) is taxed in Maryland for sales tax purposes as a service at a 3% rate. SaaS intended for individual use (not used for business purposes in an enterprise computing system) is treated as a digital product and is subject to sales tax at a 6% rate.
If the provision of SaaS services can fall into both categories, Maryland applies the higher sales tax rate. Furthermore, the previously provided sales tax exemption for custom software or SaaS services is repealed effective July 1, 2025.
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DISCLAIMER
The information contained in this article does not constitute legal advice or professional consultancy of any kind; it is provided solely as general, explanatory information. Please also note that ExportUSA is neither a law firm nor an accounting firm. We strongly advise against making decisions based solely on the content of this page, as the information provided may be outdated or contain inaccuracies. Readers should always seek guidance from qualified professionals before acting on any information presented here.
DISCLAIMER
The information contained in this article does not constitute legal advice or professional consultancy of any kind; it is provided solely as general, explanatory information. Please also note that ExportUSA is neither a law firm nor an accounting firm. We strongly advise against making decisions based solely on the content of this page, as the information provided may be outdated or contain inaccuracies. Readers should always seek guidance from qualified professionals before acting on any information presented here.
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