Do You Need to Charge Sales Tax on Digital Products? Where, When, & How Much?

If you’re a small business owner, influencer, entrepreneur, or however you identify yourself, you’ve likely heard of digital products. Digital products are one of the best ways to generate passive income online and can be a lucrative option for your business. But, what about sales tax? How does it work?

Depending on your state, or even the type of digital product/digital goods, you may be subject to or even exempt from sales tax. For example, Virginia doesn’t tax digital goods and services, but only video games are exempt in Colorado.

Let’s take a look at whether you need to charge sales tax and how much:

Do You Need to Charge Sales Tax on Digital Products?

As mentioned above, it depends on the state your business is conducted in or even where your product is purchased. The variations stem from the fact that most laws regarding sales tax were set before digital products and digital goods became a thing, meaning it’s unprecedented and will likely change in the future.

Even states that agree on what a digital product is – because this too is under debate – have different laws regarding sales tax on digital products. 

For today, since we can’t cover the taxability of each different digital product, we’re going to focus on the most popular digital products for small businesses:

• Digital Audio Files (podcasts, audiobooks, music)
• Digital Books (ebooks, PDFs, online magazines)
• Online Course (combination of products)
• Digital Photographs

Now that we’ve identified the digital products we’re discussing, let’s break down the states and if these digital products are taxed:

Alabama

Yes, they generally have a 4% sales tax on all digital goods and products.

Alaska

No, there is no state sales tax.

Arizona

Yes, they charge sales tax on digital goods. Arizona sales tax is 5.6%.

READ ALSO: What Does SBI Mean for Arizona Small Businesses?

Arkansas

Yes, Arkansas applies the full sales tax of 6.5% for digital products including digital audio works, audio-visual works, digital books, and digital code.

California

No, they do not generally require a sales tax on digital products/downloads that do not have a physical storage medium.

Colorado

Yes. As of January 2021, digital goods are subject to the state sales tax of 2.9% and applicable local sales taxes.

Connecticut

Yes, digital goods as defined by the State of Connecticut DRS will be taxed at the state sales tax rate of 6.35% as of October 1st, 2019.

Delaware

No. Delaware does not have a state sales tax, so the purchase of digital products are not taxable.

Florida

No, digital product sales are exempt from Florida sales tax as they are not classified as tangible personal property.

Georgia

Yes, digital products that you retain possession of are taxed at the state sales tax rate of 4.00%.

Hawaii

Yes. Digital products are subject to the state sales tax of 4.00%.

Idaho

Yes. Similar to Georgia, Idaho only taxes digital products that you retain possession or ownership of. Idaho has a sales tax rate of 6.00%.

Illinois

No, sales of digital products are exempt from sales tax.

Indiana

Yes, as of January 1st, 2023, transactions containing digital products are considered retail transactions in Indiana and will be taxed at the state sales tax rate of 7.00%.

Iowa

Yes, digital products in Iowa are subject to their state sales tax of 6.00%. Some exemptions may apply.

Kansas

No, Kansas does not require businesses to collect sales tax on digital products.

Kentucky

Yes, the Kentucky state sales tax of 6.00% is imposed on digital products.

Louisiana

Yes, digital products are subject to the Louisiana state sales tax of 4.45% as noted in the Revenue Information Bulletin No. 11-005.

Maine

Yes, digital products are taxable in Maine. These products are taxed at the state sales tax of 5.5 %. 

Maryland

Effective March 14, 2021, the Maryland sales and use tax of 6.00% applies to the sale of digital products.

Massachusetts

No, Massachusetts does not require businesses to collect sales tax on digital products.

Michigan

No, the sales of digital products are exempt from sales tax in Michigan.

Minnesota

No, non-tangible versions of tangible goods such as e-books are not taxable according to the Minnesota Sales Tax Base.

Mississippi

Yes, all digital products and goods are taxed at the state sales tax rate of 7.00% starting July 1, 2023.

Missouri

No, sales of digital products are exempt from the Missouri state sales tax. 

Montana

No, Montana does not have a state sales tax and does not charge sales tax on digital products.

Nebraska

Yes, sales of digital products in Nebraska are subject to both the state sales tax rate of 5.5% and the local sales tax that may range from 0.5% to 2.0%.

Nevada

No, the Nevada sales tax is only applicable to physical goods and certain services.

New Hampshire

No, New Hampshire does not have a state sales tax and does not require sales tax on digital goods or products.

New Jersey

Yes, there is a state sales tax of 6.625% that is applied to digital products sold and delivered to an address located in New Jersey.

New Mexico

Yes, digital products are subject to the New Mexico state sales tax of 5.0% and a possible local sales tax of up to an additional 3.813%.

New York

No, digital products are not subject to sales tax in New York.

North Carolina

Yes, digital products are taxable at the 4.75% states sales tax rate in North Carolina.

North Dakota

No, the sales of digital products are not taxable in North Dakota.

Ohio

No, Ohio does not tax digital products.

Oklahoma

No, Oklahoma does not tax digital products.

Oregon

No, Oregon does not have a state sales or transaction tax and does not impose a tax on digital products.

Pennsylvania

Yes, Pennsylvania applies the commonwealth’s 6.00% sales and use tax on digital products.

Rhode Island

Yes, starting back in 2019, digital products are taxed according to the state sales and use tax rate of 7.00%.

South Carolina

No, digital products are not taxed in South Carolina.

South Dakota

Yes, the sale of digital products in South Dakota is subject to the state sales tax of 4.50% and any applicable municipal taxes.

Tennessee

Yes, digital products in Tennessee are subject to the state sales tax of 7.00% and a standard local tax rate of 2.5% versus the actual local tax rate of the county.

Texas

Yes, digital products are subject to the Texas state sales tax of 6.25% if the tangible form is also taxable.

Utah

Yes, digital products in Utah have a 4.7% sales tax rate.

Vermont

No, digital products are not subject to a sales tax in Vermont.

Virginia

No, Virginia does not tax digital products, they only tax physical goods and specific services.

Washington

Yes, digital products are taxable in Washington at the state sales tax rate of 6.50%.

West Virginia

No, digital products are exempt from the state sales tax in West Virginia.

Wisconsin

Yes, Wisconsin state sales tax of 5.00% applies to the sale of digital products. They may also be subject to a 0.5% county sales tax.

Wyoming

Yes, any digital products sold to a user with rights for permanent use are taxable in Wyoming at the state sales tax rate of 4.00%.

If you’re unsure how to calculate or collect sales tax for your digital products, connect with an expert at ModVentures today!