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Sales Tax for Digital Products: Nexus, Non-Digital Formats, Services

sales tax digital products services

In part one of this two-part blog series, we looked at some of the simple ways that sales tax will work for digital products. With more and more areas of our world going this direction, this is important for many businesses and their sales tax needs, from simple questions about whether sales tax should be charged on such products to several related areas.

At SalesTaxSolutions.US, we’re here to offer a huge range of sales tax registration, compliance and related services to business clients. What are some additional important areas to be thinking about here? Let’s dive in.

Is the Non-Digital Format Taxable?

In many states, such as Colorado for instance, one of the key determinants of whether a given digital product should have sales tax applied to it is whether the equivalent non-digital product would be taxable. In this state, for example, if you sell an e-book that’s downloaded, no sales tax is due. However, if you sell a physical book via mail order, sales tax would be added to the transaction.

This isn’t always the case – in some states, digital products are taxed regardless of what you could consider their “real world” counterpart. It’s important to work with a sales tax professional in your state to ensure you’re handling things correctly.

Do You Have Nexus in the State?

Nexus, for those who may not be aware, is basically a term used to describe whether your business has a “physical presence” in a state. This can be through having employees, an office or other physical space in the state, inventory stored there or any number of other factors.

If you have nexus in a state, you’re required to collect and remit sales tax from buyers in that state – even if they don’t live there. This is the case regardless of whether you have a digital or physical product.

However, if you don’t have nexus in the state, you’re not required to collect sales tax from buyers there regardless of what kind of product it is that you sell. This can obviously lead to some challenges if you do business in a number of states, but that’s where working with a sales tax expert can help immensely.

What About Services?

One of the more confusing aspects of sales tax for many business owners is how services fit into the picture. After all, it’s not as though you can physically ship a service to someone in another state, so how can nexus or similar concepts apply?

The truth is that services can be taxable in some situations and not in others. It all comes down to the specific service being performed and the state in which it’s taking place. Once again, this is an area where working with a sales tax professional who understands these issues in great detail can help you ensure you’re never overcharging or undercharging customers on services.

For more on how sales tax works for digital products and services, or to learn about any of our sales tax registration, compliance and similar services, speak to the pros at SalesTaxSolutions.US today.


Christopher Stout

Christopher Stout has 25 years of experience as a sales tax accountant, working across a wide variety of industries and sales platforms. He's personally prepared or supervised the preparation of over 60,000 sales and use tax returns in his career.

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