Sales tax laws are subject to each state
Each state passes its own sales tax laws. It’s important to note that sales tax policy and changes in the online space don’t exactly keep pace with one another. (Let’s just say that in a race, tax policy is the tortoise and the internet is the hare.) So, in some states, sales tax law related to digital goods may be based on a law that state passed in 2015. And we all know a lot can change online in a decade.
That’s why it’s important to work with a CPA who can accurately translate sales tax policies to modern day digital goods.
What is sales tax nexus?
First, a lesson on sales tax nexus. Sale tax nexus is the criteria that exists between a business and a state or municipality making it liable to that jurisdiction’s sales tax laws. There are a number of activities that states have determined create nexus: physical presence, affiliate, click-through, and economic nexus. This post explains each of these in more detail.
Before deciding whether to charge sales tax on digital goods sold by your business, you’ll want to determine your company’s nexus footprint. You can do this through a nexus study completed by a CPA firm with knowledge of multistate taxation. During a nexus study, your CPA will collect information about your online and in-person activities in all 50 states. From this, you’ll receive a report explaining current tax laws and your exposure in each taxing jurisdiction. Because tax laws change constantly, we recommend performing nexus studies annually or every other year.
Once you’ve determined which states you’re liable to sales tax remittance, you can then begin to answer the question: should you charge sales tax on digital goods?
What is considered a digital good?
There are multiple types of digital goods.
First, there are software-as-a-service (SaaS) products, which include cloud-based software like Quickbooks, Zoom, and Salesforce.
There is also traditional software, which is purchased and downloaded directly to your local device (rather than accessed in the cloud). Microsoft Word and Photoshop are examples of software that you download and access directly on your computer.
Then there are other digital download products like e-books, movies, music, online courses, art prints, photos, and PDF templates.
Why is it important to differentiate between all these digital goods? For sales tax purposes, of course! Many states dictate when to charge sales tax based on the type of digital product being sold.
Should you charge sales tax on digital goods?
Whether or not to charge sales tax on these types of digital products will vary state by state. Let’s take a look at one of the states we at Landmark CPAs call home: Arkansas.
Arkansas Sales Tax Law on Digital Goods
Let’s break down this bit of Arkansas tax code:
“Gross receipts derived from the sale or licensing of both pre-written and custom software in Arkansas are subject to tax whether the software sale or license is for a single use or for multiple use, provided that the software is delivered through a tangible medium. The licensing of software downloaded through a modem or by other electronic means is not subject to tax if charges for the licensing are separately stated from charges for any manuals, disks, CD’s, or other tangible property. Separately stated charges for technical support for software are not subject to tax.”
If software is sold through a tangible medium—like a CD (remember those?)—then it is subject to sales tax because it’s considered tangible personal property. But let’s say you were to sell a piece of software downloadable directly to your customer’s device (no CD required), then that would not be subject to sales tax.
What about other digital goods, like SaaS products and digital downloads?
As we mentioned above, tax law doesn’t move as quickly as the online world. Because this piece of tax code was written prior to cloud-based offerings like SaaS products being commonly sold, SaaS products are not explicitly called out as being taxable or non-taxable. However, based on the language within the tax code, a SaaS product or other digital download, like an e-book, is not considered tangible personal property, and therefore would not be subject to sales tax.
Should you charge sales tax on digital goods in other states?
As we mentioned above, each state has its own sales tax laws on the books, some more updated than others. That’s why it’s important to work with a CPA firm that’s knowledgeable of multistate taxation to help advise you both on sales tax nexus and which products are considered liable to sales tax.
Stay sales tax compliant with Landmark CPAs
Ensure sales tax compliance when you work with Landmark CPAs. We offer numerous business consulting services, including sales tax nexus studies, projections and forecasts, buy/sell agreements, and more. Get in touch with us here.
