Digital products move fast, and the tax rules for them keep changing. Every US state has its own rules regarding what counts as a taxable digital product, how it should be classified, and which rate applies. Those varying regulations can turn a simple online sale into a multilayered compliance exercise. Any business that sells digital goods at scale must address these rules because they can dictate how you charge customers, where you register, and how you operate as you grow.

Below, we’ll explain how to assess sales tax on digital products by state, how states determine taxability, and the sourcing rules that decide which jurisdiction’s rate applies.

What’s in this article?

• How can you assess sales tax on digital products by state?
  
• What is a digital product?
  
• How do states determine whether digital products are subject to sales tax?
  
• How do state-by-state tax differences affect business operations?
  
• What sourcing rules govern where sales tax on digital products is applied?
  
• What challenges do different tax classifications create?
  
• How can businesses create a compliant approach to sales tax on digital products?
  
• What tools help businesses manage multistate tax compliance for digital products?
  
• How Stripe Tax can help
  

How can you assess sales tax on digital products by state?

To assess sales tax on digital products by state, look at the rules of every state you operate in. Different states have different methods of defining digital products and apply different sales tax rules to them.

What is a digital product?

Generally, a digital product is something you sell or deliver electronically that exists only in digital form. The US digital economy reached $4.9 trillion in 2025 and includes music files, movies, e-books, software licenses, software-as-a-service (SaaS) seats, online courses, in-game items, and any paid content customers stream, download, or access through an account.

When they legally define what constitutes a digital product, many states borrow language from the Streamlined Sales and Use Tax Agreement (SSUTA). This is a voluntary initiative of 24 states that work together to make their sales tax systems more consistent. The SSUTA groups digital goods into three categories: digital audiovisual works (e.g., movies, streaming video), digital audio works (e.g., music, podcasts, audiobooks), and digital books. States independently decide which of these categories are taxable.

Other states take a broader interpretation. Maryland defines a digital product as anything obtained electronically by a customer. This can include downloads, subscription access, and more, which means almost any digital content or service can be taxed.

Some states rely on looser definitions and tax digital products as services or intangibles. New Mexico, for example, taxes nearly all services by default, so digital goods automatically fall under its broad gross receipts system.

If you sell digital products across multiple states, you should understand each state’s legal vocabulary. The label—whether it’s a good, a service, tangible, or intangible—drives the tax outcome.

How do states determine whether digital products are subject to sales tax?

States use a mix of old rules and newer interpretations to decide how digital products fit into their tax systems.

States with broad tax bases often tax more services or intangibles, so digital goods frequently fall under their existing rules without the need for new legislation. Their rules often cover downloads, SaaS, streaming, and other digital formats by default.

States such as California and Florida exempt many digital downloads because they don’t treat electronically delivered content as tangible property. They don’t follow national trends.

Some states classify digital goods under categories such as tangible property and taxable services without naming digital products specifically. Others exempt them by omission, which can create uncertainty for sellers trying to classify their products.

How do state-by-state tax differences affect business operations?

Differing tax rules across states make business operations more complex as the customer base expands. Here’s how:

• Administrative load increases quickly: As sales increase across states, businesses might need to register, collect, and file in dozens of jurisdictions. Each state adds its own deadlines, filing cycles, and compliance routines.

• Pricing and billing systems get more involved: Tax rates vary by state and sometimes by city or county. Checkout systems must calculate the right rate for every customer. Businesses also have to explain to customers why the same digital product is taxed in one location and not in another.

• Continuous monitoring is required: States can introduce new rules, redefine taxable categories, or adjust rates, and sellers must adapt in real time. That might involve updating internal systems, adjusting product tax codes, or recalibrating pricing.

• Accounting and cash flow need attention: Collected sales tax isn’t revenue. Teams must treat these funds as liabilities, reconcile them, and remit them on schedule. Missing or late filings can trigger penalties.

• Compliance cost influences business strategy: Some markets take more effort to manage than others because of nuanced local rules or high administrative demands.

What sourcing rules govern where sales tax on digital products is applied?

Sourcing rules determine which jurisdiction’s tax rate applies to a digital sale. Here are the specifics:

• Destination-based sourcing dominates: Several states tax digital products based on the customer’s location. Billing address, residence, or verified location data usually determines the applicable rate.

• Origin-based rules exist but rarely control digital sales: A few states use the seller’s location for some in-state transactions, but interstate digital sales almost always default to destination rules. Even origin-based states switch to destination-based sourcing when the customer is out of state.

• Mixed models create edge cases: Some states use different sourcing rules depending on the product type or whether the sale crosses state borders. This can affect how businesses code transactions in internal systems.

• Accurate location data is important: Because digital goods have no physical delivery point, businesses rely on billing information or geolocation to determine tax jurisdiction. Checkout flows must capture this to avoid misapplying tax.

• Global rules follow the same principle: Globally, value-added tax (VAT) and goods and services tax (GST) systems typically tax digital services where the customer resides. Sellers that expand internationally usually follow the same destination logic, just with different terminology and tax regimes.

What challenges do different tax classifications create?

Digital products aren’t in the same category everywhere, so businesses must deal with conflicting rules. Knowing these rules is the first challenge.

Consider these issues:

• Conflicting definitions of the same product: States treat items such as SaaS products, streaming services, and e-learning platforms differently. These are taxable goods in some places and exempt services in others—one product can be taxed in half the country but not in the rest.

• Extensions of physical analog logic: Some states tax digital versions of products that are taxable in physical form. Others exempt the digital equivalents of physical goods they already exempt, such as textbooks and newspapers.

• Broad or ambiguous classifications: States that lump digital goods into categories such as “information services” and “tangible property” create ambiguity about what is included. Businesses often have to interpret vague language or seek formal guidance to avoid missteps.

• Risk of over- or undercollection: Misclassification can lead to collecting tax where none is owed or not collecting where it is. Both of those outcomes create problems. Overcollection risks customer complaints, while undercollection leaves the business liable for the tax plus penalties.

• Constantly shifting definitions: States regularly revise what counts as a digital product as new business models emerge. Sellers must keep pace with updated definitions, new product categories, and developing interpretations, even when the underlying offering hasn’t changed.

How can businesses create a compliant approach to sales tax on digital products?

A solid compliance plan should outline your obligations, set up reliable systems, and adapt as rules change. Here’s how to create one:

• Identify where you have nexus: Review your sales and activity in each state to determine where you’re required to collect tax. Economic thresholds make this an ongoing task.

• Confirm each product’s taxability in each state: Map your digital products against state rules so you know where each item is taxable or exempt. Accurate product classification is key to accurate tax collection.

• Register before you collect: Once you know where you owe tax, register for sales tax permits in those jurisdictions. Each state assigns filing frequencies and account credentials you’ll need to manage.

• Automate calculation and collection: Integrate a tax engine that applies the right rate and handles local variations at checkout. Assign tax codes to products so classification stays consistent across markets.

• File and remit on schedule: Treat collected tax as a liability, and use reporting software to complete state filings accurately and on time. Automation or filing partners can reduce the administrative load.

• Document everything: Maintain transaction data, exemption certificates when relevant, and records of what tax codes apply to each product. These materials matter during audits.

• Monitor changes, and adjust quickly: Tax rules for digital products change, so make reviewing nexus status, rate updates, and classification changes a habit. Staying up-to-date can prevent compliance gaps.

• Bring in experts when needed: Consult tax advisers or legal specialists to learn how your product fits into a jurisdiction’s rules. Thoughtful guidance now avoids costly corrections later.

What tools help businesses manage multistate tax compliance for digital products?

Automation is key to managing digital tax rules across states. The volume of rate changes, product classifications, and registration requirements can be overwhelming. Businesses rely on these tools to handle it:

• Real-time tax calculation engines: These sit inside the checkout flow and apply the correct tax based on product type and customer location. They depend on updated rule sets so sellers don’t have to maintain tax tables themselves.

• Product tax code mapping: Modern systems let businesses assign tax codes to each digital product. This helps ensure the correct tax treatment across jurisdictions, which minimizes uncertainty and keeps classification consistent as laws change.

• Automated nexus tracking: Software can monitor sales by state and alert businesses when they exceed economic nexus thresholds. This prevents late registrations and helps teams stay ahead of new obligations.

• Filing and remittance support: Many systems generate state-by-state tax reports or integrate with services that file returns automatically. This removes the burden of managing dozens of filing portals and deadlines.

• Flexible compliance workflows: Good tools centralize tax settings, product mappings, location data, and reporting so changes can be made once and applied everywhere. This keeps taxes from becoming a logistical bottleneck as the business grows.

How Stripe Tax can help

Stripe Tax reduces the complexity of tax compliance so you can focus on growing your business. Stripe Tax helps you monitor your obligations and alerts you when you exceed a sales tax registration threshold based on your Stripe transactions. In addition, it automatically calculates and collects sales tax, VAT, and GST on both physical and digital goods and services—in all US states and in more than 100 countries.

Start collecting taxes globally by adding a single line of code to your existing integration, clicking a button in the Dashboard, or using our powerful application programming interface (API).

Stripe Tax can help you:

• Understand where to register and collect taxes: See where you need to collect taxes based on your Stripe transactions. After you register, switch on tax collection in a new state or country in seconds. You can start collecting taxes by adding one line of code to your existing Stripe integration or add tax collection with the click of a button in the Stripe Dashboard.

• Register to pay tax: Let Stripe manage your global tax registrations and benefit from a simplified process that prefills application details—saving you time and simplifying compliance with local regulations.

• Automatically collect tax: Stripe Tax calculates and collects the right amount of tax owed, no matter what or where you sell. It supports hundreds of products and services and is up-to-date on tax rules and rate changes.

• Simplify filing: Stripe Tax seamlessly integrates with filing partners, so your global filings are accurate and timely. Let our partners manage your filings so you can focus on growing your business.

Learn more about Stripe Tax, or get started today.