Why Sellers of Software and Digital Goods Must Consider Sales Tax

Erik Wallin
May 4, 2021

Economic nexus thresholds have become standard procedure for most U.S. states, but the taxability of software and digital products continues to vary across taxing jurisdictions.

Software and digital goods suppliers understandably have questions about sales tax. Where do my digital products or software have special tax treatment? How do I handle sales tax with bundled products? Should I consider the delivery method when applying sales tax rates?

Businesses selling software or digital products cannot afford to keep sales tax as an afterthought. Understanding the right questions to ask about sales tax and how it applies to software and digital goods will ensure organizations can better gauge any potential tax liability.

What is being sold?

Understanding what is being sold is a very important question, one which often reveals how a transaction will be taxed. All states tax sales of tangible personal property (TPP) unless specifically exempt, but services, software and other transactions (including software-as-a-service) can often have varying taxability across taxing jurisdictions in the U.S. In some jurisdictions, software-as-a-service (SaaS) may be categorized as a service, while in other jurisdictions it may be taxed as software or TPP. Knowing what is being sold helps businesses come to correct taxing determinations.  

How is it being delivered?

The method of delivery is also an important consideration. States may have various requirements for taxation, dependent on the delivery method. In some states, the method of delivery can drastically affect taxability, while delivery methods may have no impact at all in other states. Organizations need to know how their software or digital goods are delivered to their customers and the rules that apply in the states where they transact business. 

Sales tax continues to evolve

Overall, businesses selling software (especially SaaS offerings) or digital goods need to keep up-to-date on sales tax requirements. An organization may understand the taxability of digital goods in some states, but those exact definitions – while informative – may not apply in other jurisdictions. Assuming that sales tax requirements on software or digital goods are always the same can be a pitfall. 

A software business could understand how taxes apply to digital goods they’ve been selling in certain states, but maybe now that business has economic nexus in more states due to South Dakota v. Wayfair, Inc. Those additional states may have vastly different rules that apply to software or digital products from those states you originally sold to.  

Software and digital goods have come a long way, and states are catching up to applying tax to technology products. That’s why it’s essential for businesses in the software industry to remain vigilant and know how the states in which they sell may have started to equitably apply sales tax to those types of products.

Take Action

Check out our recent webinar with Bennett Thrasher to learn more about the sales tax nuances for the software industry.

Sign up for Email Updates

Stay up to date with the latest tax and compliance updates that may impact your business.


Erik Wallin

Erik Wallin is a Senior Tax Counsel on the Tax Research Team at Sovos Compliance. Erik has been with Sovos Compliance since 2011, and his main areas of focus are on U.S. Transaction Tax Law which includes special expertise in the taxation of technology and the taxation mechanisms that apply throughout the Colorado home rule jurisdictions. Erik is a member of the Massachusetts Bar, has a B.A. from York College of Pennsylvania, a J.D. from New England School of Law, and an LL.M. in Taxation from Boston University.
Share This Post

North America ShipCompliant
May 25, 2023
Out-of-State Breweries Gain Self Distribution, DtC Rights in Oregon

Under a settlement agreement, breweries located outside of Oregon now have more options for selling into the Beaver State, including direct-to-consumer (DtC) shipping and self-distribution to retailers. The settlement arose out of a lawsuit filed by a group of Washington breweries last year challenging Oregon laws that limited beer self-distribution to in-state breweries and DtC […]

EMEA VAT & Fiscal Reporting
May 24, 2023
VAT and Art: What you need to know

Significant inflation increases have impacted most of the world’s economies, with the UK still above 10% in 2023. This increase means a reduction in the purchasing power of consumers. Together with increases in the cost of raw materials, this has created uncertainty regarding growth of entire industrial departments and reduced profit margins for companies. The […]

North America ShipCompliant
May 23, 2023
Top 5 Myths Surrounding Retailer Direct-to-Consumer Wine Shipping

By Tom Wark, Executive Director, National Association of Wine Retailers Politics breed myths. This has always been the case as politics is, at its most fundamental, a form of storytelling. So it should be no surprise that myths have arisen as various elements of the wine industry have fought against consumers and specialty wine retailer seeking […]

May 23, 2023
IPT: Location of Risk and Territoriality

Much of the discussion on the Location of Risk triggering a country’s entitlement to levy insurance premium tax (IPT) and parafiscal charges focuses on the rules for different types of insurance. European Union (EU) Directive 2009/138/EC (Solvency II) set out these rules. However, a related topic of growing importance in this area concerns territoriality, i.e. […]

Asia Pacific E-Invoicing Compliance
May 23, 2023
Japan: New e-Invoice Retention Requirements

Japan’s new e-invoice retention requirements are part of the country’s latest Electronic Record Retention Law (ERRL) reform. Along with measures such as the Qualified Invoice System (QIS) and the possibility to issue and send invoices electronically via PEPPOL, Japan is implementing different indirect tax control measures, seeking to reduce tax evasion and promote digital transformation. […]