As technology evolves, there emerge more and more situations that our current sales tax laws were just not designed to deal with. Selling remotely over the internet is one of these, and when that selling involves digital products like apps, the issue of how and when to apply sales tax becomes even more complicated. That’s especially true from a seller’s point of view, as the taxability of an app depends on the state it’s purchased in and whether or not the seller has a nexus in that state.
Apple apps / iPhone apps and Android apps are subject to sales tax in many cases. As a consumer, you may want to check recent receipts from these app stores to see if you were charged sales tax for apps you purchased, just as a point of interest.
Distinctions in Digital Products
When it comes to sales tax and the way states are approaching the issue of the taxation of digital products, it’s important to understand that these digital products can fall into one of several categories. For instance, some states make a distinction between products accessed exclusively online as opposed to being downloaded to a device.
Apps but there are other issues of classification to contend with as well. For instance, Arkansas only taxes digital products that involve subscription services, while South Dakota, Texas, and Utah tax any product delivered electronically that would be taxed if it were instead delivered in physical form.
The issue of permanent or temporary access to the purchased digital content, which is what the Arkansas statute is based on, is one that various states parse differently. Wisconsin, for example, taxes “the sale, lease, license, or rental of specified digital goods” regardless of whether the purchaser has the right to use it on a “permanent or less than permanent basis and regardless of whether the purchaser is required to make continued payments for such right.”
States that Tax Digital Products
There are currently 29 states that tax digital products, including apps, in some capacity. These include:
- Alabama: considered digital files to be tangible personal property, and so taxes them as such.
- Arkansas: only applies sales tax to the transfer of digital products when it involves a subscription.
- Arizona: applies the definition of tangible personal property broadly to include digital products, and so taxes them in the same way.
- Colorado: considers digital versions of newspapers and magazines that would be taxable if sold in their physical form to also be subject to sales tax.
- Connecticut: considers digital downloads to be in the same category as computer and data processing, and so applies the 1% state sales tax rate for this category of sales to digital download transactions.
- Hawaii: includes digital products in the blanket general excise tax it applies to “virtually every economic activity” in the state.
- Idaho: taxes digital goods.
- Indiana: taxes sales that involve the electronic transfer of “specified digital products to an end user” as long as ongoing payments are not required for permanent access.
- Kentucky: applies sales tax broadly to transactions involving “digital property”, but excludes digital audio-visual works.
- Louisiana: includes digital property in category of taxable tangible property.
- Maine: “digital products delivered or downloaded to a cellular telephone electronically” are subject to state sales tax.
- Mississippi: taxes all specified digital product sales, leases, and rentals.
- Missouri: only taxes digital content associated with software that is also taxable.
- Nebraska: interprets state sales tax law to encompass digital products as well.
- New Jersey: taxes sales of specified digital products on both subscription and non-subscription bases, with some exceptions.
- New Mexico: considers it a taxable event any time information is exchanged between two computers.
- North Carolina: taxes any digital products delivered electronically that would be taxable if delivered in physical form.
- South Dakota: applies sales tax to any sale of a product delivered electronically that would be taxable if delivered in tangible form.
- Tennessee: applies sales tax to “retail sale, lease, licensing, or use of specified digital products.”
- Texas: applies sales tax to any sale of a product delivered electronically that would be taxable if delivered in tangible form.
- Utah: taxes the sale of any product delivered electronically that would be taxed if delivered by any other means.
- Vermont: taxes digital products transferred electronically that allow access on a permanent or temporary basis.
- Washington: “sales to consumers of digital goods” are considered taxable sales.
- Wisconsin: taxes both permanent and temporary sales of digital goods.
- Wyoming: specified digital goods are subject to state sales tax when permanent rights to use are transferred to purchaser.
The remaining 21 states do not tax digital products, with a few specific exceptions. For example, Iowa does not apply sales tax to transactions involving digital products as long as the entire transaction takes place online. New York makes an exception for ebooks, and Ohio taxes digital audio-visual work, digital audio work, and digital books, but excludes all other digital products.
Understanding Nexus and Destination Regulations
Of course, just a with the sale of any other type of product, state sales tax laws surrounding digital products like apps only apply if you have a nexus in the state they’re being delivered to. This can be even more complicated with apps than it is with tangible products delivered to a physical address, however, as even determining the delivery location can be difficult.
It’s conceivable that even different selling and distribution platforms for digital goods will approach this issue of delivery destination differently, but at the moment, Amazon and Google, for example, consider the delivery address to be the customer’s billing address where digital downloads are concerned.
So, to determine if you need to collect sales tax from customers who purchase your apps, you’ll have to first figure out which states you technically have a nexus in. That will necessarily include the state your business is based in, and it may or may not include any others depending on the size of your company and whether you sell anything other than digital products.
You’ll then need to examine each state’s sales tax statutes to see if the app you’re selling is taxable there, and then register with those states where you’re required to collect and remit sales tax. Most states are destination based when it comes to sales tax, and that means that the applicable rate for the sale will be that at the final delivery destination, which is likely to be considered the purchaser’s billing address.
An Evolving Landscape
Many states have been relatively slow to adjust to the introduction of new technology and how that has redefined the ways we make purchases. However, the loss of revenue from sales tax collected at brick-and-mortar stores is having a real impact on states across the country, and so many are looking at ways to expand their definitions of taxable goods and services, as well as new ways to define a nexus for sales tax purposes. For sellers of digital products, that will mean complying with all applicable laws for now, but also staying on top of any new developments in any state nexus or sales tax statutes.