In 2025, more businesses than ever are going digital — building websites, using AI, and automating their operations with software and cloud tools. But with this evolution comes a critical question:
Are your digital products or services subject to sales tax?
This is one of the most complex areas in U.S. sales tax law, and in this guide, we’ll walk you through the essential steps to determine whether what you sell is taxable — and what you can do to stay compliant.
What Are Digital Products and Services?
A digital product or service is anything delivered electronically, with no physical item exchanged. Customers either download the item, stream it, or access it via the cloud.
Examples of Digital Products:
- E-books – Kindle books, PDFs, downloadable guides
- Music files – MP3 albums, single tracks
- Videos and movies – Downloadable movies, video lessons
- Stock photos or graphics – Shutterstock downloads, icon sets
- Software downloads – Antivirus, games, productivity tools
- Mobile apps – Paid apps from app stores
- Digital art and NFTs – Digital illustrations, blockchain assets
- Virtual goods in gaming – Skins, weapons, in-game currency
- Templates and plugins – WordPress themes, Excel templates
Examples of Digital Services:
- Streaming services – Netflix, Spotify, YouTube Premium
- SaaS platforms – QuickBooks Online, Adobe Creative Cloud, GoHighLevel
- Online courses – Udemy, Coursera, Skillshare
- Web hosting and domains – GoDaddy, AWS, Bluehost
- Remote IT services – Technical support, software maintenance
- Cloud storage – Google Drive, Dropbox, iCloud
- Subscription memberships – Patreon, paid newsletters
- AI-based tools – ChatGPT, logo generators
- Streaming pay-per-view events – Online concerts, webinars
What If You Sell a Bundle?
Many companies offer bundled products — for example, a downloadable product with consulting services. In some states, bundling taxable and non-taxable digital services or products can make the entire sale taxable unless the items are clearly itemized on the invoice.
Marketing agencies, for instance, often rely on a mix of AI tools, SaaS platforms, and digital deliverables. Each component of the service may be taxed differently. It’s critical to assess each part of your offering individually.
Step 1: Determine Where You Have Sales Tax Nexus
Before you evaluate digital product or service taxability, you need to determine where you’re legally obligated to collect sales tax — this is called sales tax nexus.
Types of Nexus:
1. Physical Nexus
You may establish nexus in a state if you:
- Have an office or warehouse
- Employ remote staff in the state
- Attend trade shows or expos
- Store inventory in fulfillment centers (e.g., Amazon FBA)
2. Economic Nexus
You may trigger nexus without any physical presence if you:
- Exceed a state’s sales or transaction threshold (commonly $100,000 in sales or 200 transactions per year)
Important: Even if your digital products are non-taxable, the sales still count toward economic nexus thresholds!
Once you meet the threshold, you must:
- Register for sales tax in that state
- File returns, even if you don’t collect tax
RJM offers free economic nexus assessments to help you determine where you’re obligated to register.
Step 2: Categorize Your Digital Product or Service
To determine taxability, you must first classify what you’re selling.
Ask Yourself:
- Is it a product or a service?
- Is it downloaded, streamed, or accessed online?
- Is it automated/self-serve or custom/human-delivered?
Categorization Framework:
|
Category |
Description |
Examples |
|
Digital Good |
Pre-made product delivered electronically |
E-books, music files, stock photos |
|
SaaS (Software-as-a-Service) |
Subscription to cloud-hosted software |
Salesforce, GoHighLevel, Canva |
|
Custom Software/Service |
Tailored or custom-built solution |
Bespoke dashboards, custom integrations |
|
Data Services |
Sale or access to structured data |
Lead lists, scraped datasets |
|
Streaming or Access-Based |
Subscription with temporary access |
Netflix, Coursera, online memberships |
|
Digital Marketing Services |
Platforms or services that promote content or ads |
Mailchimp, SEO agencies, ad platforms |
Step 3: Consider How the Digital Product/ Service Is Delivered
|
Delivery Method |
Tax Implication |
|
Download |
Often treated like tangible goods — more likely taxable |
|
Streaming or Cloud |
Taxability varies; may be exempt or taxed as a service |
|
Email or Manual Send |
Possibly exempt if classified as professional service |
Step 4: Is It Canned, Customized, or Bundled?
- Canned (Prewritten) Software: Often taxable if downloaded or accessed via SaaS
- Custom Software: Usually exempt if tailored to one client
- Bundled Digital Products/Services: May become fully taxable unless broken out on invoice
Tip: Always itemize invoices to clarify what’s taxable vs. non-taxable.
Step 5: Clarify User Rights
- Is the user owning the digital item?
- Or are they licensing it temporarily?
Permanent transfer of rights (like ownership) often triggers taxability in more states.
Step 6: Check State-Specific Tax Rules
Once you’ve classified your digital offering, check taxability in each state where you have nexus:
|
State |
SaaS Taxable? |
Digital Goods Taxable? |
Notes |
|
Texas |
Yes |
Yes |
SaaS treated as data processing |
|
New York |
No (SaaS) |
Yes |
SaaS exempt, digital goods taxed |
|
California |
No |
No |
Most digital products & services exempt |
|
Washington |
Yes |
Yes |
B&O tax also applies |
|
Florida |
No |
Sometimes |
Streaming taxed, downloads may not be |
Final Thoughts
Digital product and service taxability is one of the most confusing and rapidly evolving areas of U.S. sales tax. Don’t assume your digital offerings are exempt — and don’t wait until you’re audited to find out.
Need Help?
RJM offers:
- Free sales tax nexus assessments
- Categorization helps for your digital products
- Full-service sales tax registration and filing support
Reach out to us at support@rjmtaxexemption.com
Or book a discovery call.
