Can states collect tax on digital goods? Search online, and you’ll find a common belief among business owners and journalists that no such tax exists. After all, digital goods aren’t physical items, so how could sales tax apply? As with many things on the web, the common belief is…wrong.
Let’s start from the beginning. What are sales taxes and digital goods? Sales tax is a tax on the sale of a thing. Traditionally, most CPAs viewed this “thing” to be something with a physical presence. If you purchase an Elvis outfit for Halloween or your personal desire to be an impersonator, the retailer will collect the sales tax and deposit it with the state where the purchase is made. In California, for instance, the rate would be 7.25 percent of the $1,000 you paid for the outfit. $1,000? Come on. If you’re going Elvis, you are going to go with quality! Regardless, the retailer would collect $72.50 in tax and remit it to the state. The money would then be used for something useful like building a road to nowhere.
And what about digital goods? While useful, the average ebook isn’t exactly a physical product. A recent Internet sales tax Supreme Court decision suggests the form of the product doesn’t figure into the answer so much as to whether you are selling into the state in question. This video explains how different states are approaching the issue and some of the problems online sellers are facing.
What can you do about collecting and remitting taxes on digital goods? Talk with a CPA familiar with online sales to get your processes in order. The good news is we should see computer programs coming out sooner that take care of the filings for you.