Do states tax digital products?
Michael J. Fleming is the founder and president of Sales Tax and More, a full-service consulting and solutions firm with a passion for state tax. He is one of the country's leading authorities on sales tax issues such as consulting and research, registrations, returns, nexus, drop-shipping, eCommerce, and service providers.
Michael is a renowned writer and speaker, and he regularly presents on webinars. He is also the host of the Sales Tax and More Podcast, where he shares his wisdom and learnings with his audience in order to help them navigate the tricky world of taxes.
In this episode…
Mike Fleming and Ellie Moffat talk about whether or not states tax digital products.
Here’s a glimpse of what you’ll learn:
Do states tax digital products?
What is considered a digital product?
What are the misconceptions about the taxability of digital products?
Is a state’s legislation on the taxability of digital products set in stone?
Connect with Michael
Episode Transcript - Audio Version
[00:00:00] Welcome to Sales Tax and More, your go to resource for all things state tax related. Now, here is your host, Michael Fleming.
Hi, Mike Fleming here, founder of Sales Tax and More. And today's co host of the Sales Tax and More podcast, where we talk about everybody's favorite topic, which is of course, sales tax. And today we're going to talk about, if states tax digital products. But before we get into it, let me introduce you to my co host Ellie Moffat.
Hey, everyone. Great to be here. And I'll do a quick introduction for Sales Tax and More. As always, we are a full service consulting and solutions firm. So we do a lot of sales tax
[00:01:00] returns, sales tax registrations, consultations, research, and like our name states more. So if you have questions about our services, if you'd like to work with us, please reach out, let us know.
We'd love to hear from you. And we would love to work with you as well. So, Mike, that all being said, why don't we jump right in? So do states tax digital products? Well, Ellie, as always, my answer is it depends. And in this instance, it's going to, to depend number one on the state in question. But more importantly, what's a digital product?
Some states have specific definitions of what a digital product is. Other states do not. You know, downloaded software, you know, common sense may tell us it's a digital product, but some states by statute define it as tangible personal property. So what do you mean by
[00:02:00] digital products? Well, okay. What about downloaded pictures, videos, books, things that people are downloading from the internet?
Again, it's going to depend on the state. In a state like California, they're not going to tax any of these types of items. These are items that, California only taxes tangible personal property. So none of these items would be taxable there, as opposed to a state like Washington, that pretty much taxes everything and, they would all be taxable there.
So, some states are going to say, If the tangible version is taxable, then the digital version is also taxable and vice versa. If the tangible, version is not taxable, then the digital version is not going to be taxable. Other states, like we were talking about before, you know, are going to define what a digital product is. In
[00:03:00] those, you know, one of the categories that we're seeing more and more states tax, are what's called a digital audio visual work video or a movie, in other words, so digital audio visual works, and they started taxing this in order to go after companies like Netflix. Who was broadcasting digital audiovisual works, however, as is often the case when the state throws a wide net, they end up catching a lot of other activities that may or may not have been, their intent.
For example, many people who, have, live webinars often, have pre recorded webinars. And now the live webinars are generally not going to be taxable, but in quite a number of states, states that tax, digital audio visual works, then a webinar could actually become taxable if there's, if you're
[00:04:00] paying to access it. So why, why are people getting this wrong? What's the misconception that's happening? Let's, let's take a step back. So, the answer is it's going to be greatly different from state to state and rather than spend hours and hours on, this podcast here going through, you know, a picture, a video, a book, because, it could be different from state to state.
What I suggest is reaching out to us offline and we can go through these types of issues. But some states are going to tax pretty much all digital products. Some states just one or two things in some states. None at all. Why do people get it wrong? It's not just digital products, but when we think of how our own state taxes something, we apply that across all of the states. Well, if my state taxes it, all states should tax it, or if my state doesn't tax it, well, no states will tax it. That's the biggest
[00:05:00] reason I see people getting not just digital products wrong, but the taxability of a lot of different things wrong. We can't project what our state does because each state is different and all the states have their own ideas of what should and should not be taxable.
So that's number one. Number two is. People often get, maybe they get the taxability right, but where's the sales sourced? I mean, when we're talking about tangible personal property, something we can see, touch, feel, smell, where we're shipping that item is generally going to determine where the sale is sourced, but we're not shipping anything.
When it comes to, digital properties. So that's very confusing. People get it wrong. Most states have a hierarchy of knowledge. You know, what did you know at the point of sale? What type of information? Did they tell you where there was going to be getting downloaded? Did they download it at your location? A lot of
[00:06:00] times this defaults to the information gathered during the transaction itself. I mean, a lot of these digital, items are purchased online and you've got to enter your credit card information. So the billing address is often, the information known at the point of sale and that's where it's going to be sourced.
So lots of different reasons why people get this wrong. All of them very valid and, and, Did I get that question for you? I think so. I think so. Is there anything, I mean, it kind of sounds like you're heading here anywhere, but anyway, but anything else you want to add in about this topic as a whole?
Yeah, absolutely. The, you know, this is something that's rapidly, advancing technology and, states are struggling to keep up. You know, sometimes, use Michigan as an example. There's a number of years back in a nine month period, they said downloaded software.
[00:07:00] Which in most instances is not going to be considered a digital product and, state of Washington, it could be, but in most states, it's going to be treated differently.
And they said it was, going to be, it, it started out as non taxable. Then they said it was going to be taxable. Then the court slapped them and they said it was going to be non taxable. So three different ways to, to look at it within a nine month period, basically. So, states are trying to play catch up.
How do they get their arms around this? How do they tax it? Should they tax it? And it's constantly evolving, constantly changing. So, Mike, I guess. My last question here is technology is really advancing rapidly. We all know that it's, there's, it's, there's always changes. Things are always changing. Is any of what we've talked about really set in stone? You know, like we alluded
[00:08:00] to in the, in my previous answer, I don't think so. This, you know, look at, Michigan. We had three changes in approximately nine months. So, This is always changing of all the areas of sales tax. You know, digital products is one of those areas that's changing the most. So, we're starting to see trends.
So, the digital audio visual works, is, is a big one. More and more states taxing more of that every year, more and more states taxing other digital products, you know, digital, audio books, You know, are also being taxed in more and more states every year. So it's not set in stone just because it was not taxable last year does not mean it's not taxable this year, or even just because it was not taxable yesterday does not mean it is, not taxable today or taxable today.
Thank you so much, Mike. And I'll just kind of wrap
[00:09:00] this up by saying, you know, if you have sales tax needs, we offer many solutions and services. You can reach out to me directly. If you have questions, my email is E Moffat. That's E M O F F A T at sales tax and more. com. You can also visit our website, sales tax and more. com. And in addition to the services we offer, we have an entire free series of webinars and resources on our website. And I forgot to say already, but if you've enjoyed listening with us, if you like this podcast, please like, and subscribe. It helps us out substantially. Thank you so much for joining us.
Thank you everyone. And, hope to see you on the next episode of the Sales Tax and More podcast. Bye bye.