Sales Tax on Digital Sales in the U.S.: How Does It Apply?

The evolution of the digital economy has dramatically changed the way products and services are sold and purchased. With this transformation, the need has arisen to update tax laws to ensure that sales taxes are appropriately applied to digital transactions. In the United States, the application of sales tax to digital sales varies by state, which can cause confusion for sellers.

In this article, we’ll explore how sales tax works on digital sales in the United States, what types of products and services are subject to this tax, and how sellers can ensure compliance with tax regulations.

What is Sales Tax?

Sales tax is a tax on the sale of goods and services that is charged to the final consumer. This tax is collected by the seller at the point of sale and subsequently remitted to state and local tax authorities. In the context of digital sales, sales tax can apply to a variety of products and services, depending on specific state laws.

What Types of Digital Sales Are Subject to Sales Tax?

Digital Goods

Digital goods include products delivered electronically, such as music downloads, e-books, movies, software, and games. The application of sales tax to these products varies by state.

States that Tax Digital Goods:

• Texas: Applies sales tax to most digital goods.
• New York: Taxes the sale of downloadable software and other digital goods.
• Washington: Applies sales tax to digital downloads of music, movies, and books.

Digital Services

Digital services encompass a wide range of activities, such as online streaming services, cloud storage, software as a service (SaaS), and more. As with digital goods, the application of sales tax to digital services varies by state.

Examples:

• California: Does not tax most digital services but may apply sales tax to certain specific services.
• New Jersey: Applies sales tax to cloud storage services and certain software services.

Subscription Products

Digital subscriptions, such as memberships to video and music streaming services, can also be subject to sales tax. This depends on how the state classifies these services and the specific laws that apply.

Examples:

• Florida: Applies sales tax to streaming service subscriptions.
• Illinois: Taxes subscriptions to software services and other digital products.

How to Determine If You Should Charge Sales Tax on Digital Sales

Tax Nexus

The concept of tax nexus refers to the sufficient connection that a business must have with a state to be required to collect Sales Tax. This connection can be physical (e.g., having an office or employees in the state) or economic (exceeding a sales or transaction threshold in the state).

Economic Nexus Thresholds

Many states have implemented economic nexus thresholds that require sellers to collect sales tax if they exceed certain levels of sales or transactions in that state. These thresholds vary from state to state.

Examples:

• Florida: Threshold of $100,000 in annual sales.
• Delaware: No sales tax, and therefore no economic nexus threshold.
• Wyoming: Threshold of $100,000 in annual sales.
• California: Threshold of $100,000 in annual sales.
• Texas: Threshold of $100,000 in annual sales.
• New York: Threshold of $100,000 in annual sales and 100 or more separate transactions.

How to Collect and Remit Sales Tax

Registration

If you determine that you need to collect Sales Tax in a state, you first need to register with the state tax authorities to obtain a sales permit.

Tax Collection

Once registered, you must start collecting sales tax on all taxable digital transactions. Ensure you apply the correct tax rate, which may include state, local, and district rates.

Tax Remittance

At Prodezk, we offer comprehensive accounting and tax compliance services to help you manage all your sales tax obligations related to digital sales. Our experts can:

• Assist with Tax Registration: Help you register to collect sales tax in states where you have nexus.
• Accounting Management: Keep your records organized and accurate to ensure compliance.
• Filing Returns: File your sales tax returns on time and correctly.
• Tax Advice: Provide guidance on applicable exemptions and how to maximize your tax benefits.

Sales tax on digital sales is a complex area that requires a clear understanding of state laws and regulations. Ensuring compliance with these requirements is essential to avoid penalties and keep your business in good standing.

If you have questions about sales tax in the United States, contact us and receive a free consultation with our expert accounting team.