Should I Charge Sales Tax on My Digital Products?

Jun 6, 2023 | Tax News

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The creation and selling of digital goods changed the world of business forever.

Not only can small business owners now make a living through the selling of 100% intangible products like courses and ebooks, but they can do it from any geographic location.

Of course, this kind of freedom is exhilarating.

But it also brings up new challenges, especially when it comes to sales tax.

The world of digital commerce has many business owners wondering how to determine sales tax for their digital products.

This month, we’re talking about sales tax on digital goods: what it is, who has to pay it, and why it matters.

WHAT ARE DIGITAL GOODS?

Digital goods (also known as e-goods) are non-physical products that are sold and delivered online.

Some examples include (but aren’t limited to): ebooks, courses, downloadable music, graphics, worksheets, video tutorials, and PDFs.

If the product in question is non–physical and is created and sold in the digital space, then it’s considered a digital good.

IS THERE A STATE SALES TAX FOR DIGITAL PRODUCTS?

The digital marketplace is still relatively new, so the taxability of digital products varies from state to state.

Some states apply previously existing tax rules to digital products.

Others have enacted new legislation to create new taxation rules for digital goods.

And some don’t tax digital goods at all.

DOES MY STATE TAX DIGITAL GOODS?

Answering this question is tricky for a few reasons:

  • States have differing definitions for what constitutes “digital goods.” Does your ebook count as a taxable digital product? It depends on the state.
  • Some states exempt certain types of digital goods from taxation but not others. In Massachusetts, for example, digital games are taxable, but other digital products aren’t.
  • Taxation of digital goods can depend on whether sales tax is determined by the product’s state of origin or its destination. If your state of business is origin-based, you’ll collect tax on your sales based on your location. (If your state taxes digital goods, that is.) Destination-based sales tax means you’ll use the tax rate wherever your product goes.
  • Whether or not you charge sales tax can depend on your business’s nexus. Nexus refers to the relationship between a tax authority and a business. For most coaches and consultants, nexus would be established after meeting a certain number of sales or transactions.

Sound complicated?

It is.

And although I’d love to give you a state-by-state breakdown, this issue is far too complicated.

Instead, I recommend working with a qualified tax professional with experience navigating digital sales tax for coaches and consultants.

Do you need expert guidance on how to handle digital sales tax?

Take our free Fit + Pricing Quiz to find out which package is right for you.

WHY IT MATTERS

The primary value provided by most coaches and consultants is knowledge.

People in these fields organize, package, and sell information in a format valued by their customers.

Because of this, e-products like the ones mentioned above are the digital bread and butter for most of my clients.

But the lack of standardized tax rules for digital products can be confusing.

If you’re selling a course, you want to know if sales tax should be calculated into your overall selling price. Failing to consider this could leave you owing more taxes than you planned.

SHOULD I CHARGE SALES TAX ON MY DIGITAL PRODUCTS?

When it comes to sales tax on digital products, my first advice is always to work with a qualified tax professional.

With that in mind, here are some general guidelines as a starting point:

  1. Determine Your Sales Tax Nexus: Research the rules for the states where you sell your product. Use these rules to determine if you need to charge sales tax.
  2. Determine If Your Digital Goods Are Taxable: Research the rules for the states where you’re selling. Some states tax digital products, while others don’t.
  3. Determine the Sales Tax Rate: Rates vary from state to state. Sometimes states do not have a sales tax, but smaller municipalities do.
  4. Determine How to Collect Taxes: You may have to collect taxes directly, or your selling platform may do it on your behalf. It depends on the state.

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If all of this sounds insanely complicated, that’s because it is.

And because tax laws constantly evolve, correct information today could be outdated a few months from now.

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Hi, I’m Jessica.

I’m the passionate tax-pert behind Tax Savvy Jessica. I spent more than 10 years performing audits for the IRS. My experience there taught me how to understand taxes from the perspectives of both taxpayers and the IRS.

I started Tax Savvy Jessica because I’m passionate about helping small business owners understand their taxes so they can use their money to build the life they want.

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