States tend to be five years or more behind in developing new sales taxes. When appropriate guidance is enacted on a new topic, it often turns into a completely different problem that needed to be addressed.
In addition to creating an ever-changing game of catch-up by states, this environment is also forcing taxpayers and tax practitioners to apply square peg tax guidance to evolving roundhole technology. To combat this, many states are creating tax laws that are as broad as possible to address technological and social developments. This is especially true for digital goods and digital products. About 31 states impose some form of sales tax on digital goods and products.
Perhaps the limiting issue in this area is defining what the terms digital goods and digital products actually mean. As with most state taxes, the answer is that it depends. Some states have detailed definitions of these terms, while others are only trying to impose taxes through regulation or informal guidance.
Historically, many states have taken the position that anything taxable when sold in tangible form is also taxable when sold in electronic form. The Colorado ruling states:
Pennsylvania approach
When the internet and digital products first became popular, some states tried to enumerate the items they were going to tax in their laws. Pennsylvania has adopted this approach, specifically allowing videos, photographs, books, apps, games, music, and “other taxable tangible property distributed electronically or digitally” to be accessed or distributed. Enumerated as taxable tangible personal property regardless of the method.
Obviously, updating this list as new technology is developed can be somewhat of a hassle. This may be why Pennsylvania simply added her NFT to the taxable list through disclosure in bulletin, rather than adding it to the statute when it comes to non-fungible tokens. Presumably, NFTs fall under the statutory language of “other taxable tangible personal property delivered electronically or digitally.”
reed maryland
Maryland leads the way in taxing digital goods, but it also has its own struggles. In 2021, the state passed HB 732, imposing a new tax on digital advertising services. HB 932 extended sales and use taxes to certain digital products. Although the company’s digital advertising services tax is the first of its kind in Japan, it faces a number of challenges.
Maryland’s laws taxing digital products include examples of what constitutes digital code and digital goods, and the following fairly broad definition of a digital product: of technology with electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities. ” This definition seems broad enough to encompass almost anything sold by any other than tangible means. This is a trend across states. List what can be done and include a definition broad enough to encompass new or developing technologies.
To provide further guidance, Maryland has issued Tax Tip #29 — Selling Digital Products and Digital Codes. The details include examples of what constitutes a digital product, such as static, non-customized information reports, electronic chat rooms, weblogs and similar products, stock photos, and artwork. Interestingly, Maryland includes Software as a Service (SaaS) in its definition of digital products, but in many states he defines digital products separately from SaaS. Maryland then offers several SaaS-related exemptions, including customized software.
When Maryland’s guidance on customized SaaS exemptions was first released, there was confusion about the scope of this exemption, specifically how much customization was required to apply the exemption. Any software that is not pure Plug and Play Software is considered customized and may qualify for the customized software exemption. In addition to this confusion, Maryland amended his definition of what constitutes taxable SaaS and enterprise software, expanding the exemption for commercial software.
new jersey and new york
New Jersey’s taxation of digital goods is more restrictive than Maryland’s. New Jersey only taxes certain digital products, including “electronically transferred digital audiovisual works, digital audio works, or digital books.” A digital audiovisual work is “a series of related images which, when displayed in succession, give the impression of movement with accompanying sound”. A digital audio work is “a work resulting from the fixation of a sequence of music, spoken words, or other sounds, including ringtones.” An e-book is “a work generally recognized in its ordinary and ordinary sense as a book.”
New Jersey therefore appears to be taking a more restrictive or traditional approach to taxing digital goods, taxing items in the digital realm that are inherently taxable in the physical realm. . Also, New Jersey generally does not tax SaaS and considers it a tax-free service.
New York is very aggressive in taxing SaaS and all kinds of electronically delivered software, not just information services, but not digital products. Digital goods such as ringtones, e-books, movies, and music are generally not subject to sales tax in New York.
Conclusion
States have taken diverse approaches to taxing digital products, and the field continues to evolve. So we can continue to see real or perceived revenue losses related to the growth of digital products as states react to new technology. While it would be nice to expect the states to achieve some kind of unified approach here, this is probably unrealistic in the near future.
However, you can expect states to carefully consider the impact of the new law and craft their tax bills carefully to achieve clarity and intended revenue objectives. A clear definition of what is taxable and what is exempt will go a long way in alleviating taxpayer concerns about taxing digital products.
This article does not necessarily reflect the opinions of The Bureau of National Affairs, Inc., publishers of Bloomberg Law and Bloomberg Tax, or their owners.
Author information
Gary C. Bingel EisnerAmper’s State and Local Tax National Tax Group partner for state and local taxes.
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