When Digital Becomes Taxable: SaaS, Streaming & Data Services in Sales Tax

Digital products have always lived in a gray area of sales tax law. Determining how to tax something that isn’t tangible has challenged state governments since the Supreme Court’s landmark decision in South Dakota v. Wayfair (2018).

As online retail space continues to grow, states are expanding how they define and tax digital goods, SaaS, streaming services, and more internet-based products. For the ecommerce seller, knowing where and when to tax their products is difficult, but a necessity. In this guide, we break down how digital goods are taxed, how the landscape has changed, and what you need to prepare for to keep sales tax compliant.

📢 Do you sell digital goods or SaaS? Our team can help you determine where you have nexus. Get a flat-rate nexus determination today!

Key Takeaways

• Digital goods are increasingly taxable: more than half of U.S. states now tax SaaS, downloads, or streaming subscriptions.
• Tax rules vary by state: inconsistent definitions mean a product can be taxable in one state and exempt in another.
• Recurring SaaS billing creates multi-state risk: subscription models often trigger ongoing nexus and filing obligations.
• Automation and current knowledge are essential: streamlined tax services, product coding, and accurate knowledge of current tax laws help prevent costly errors.

What Are “Digital Goods” in Sales Tax Law

Unfortunately, there is no single definition. Each state interprets “digital goods” differently, which is what makes compliance so complex.

When ecommerce sales tax laws were changed in 2018, some states immediately moved to tax digital goods, while others lagged. Since then, most have gradually updated legislation to reflect modern commerce.

To understand why taxing digital goods can be so nuanced, it helps to know the difference between tangible and non-tangible property:

• Tangible personal property: physical goods that can be seen, weighed, or touched (think furniture, electronics, apparel).
• Non-tangible goods: items without physical form, like downloaded software, e-books, or streaming services.

In a country where sales tax laws were written before the internet existed, digital goods don’t fit neatly into traditional definitions.

Nevertheless, many states have tried to integrate digital products into their tax laws, and some have taken more creative approaches. For example:

• Alabama and Kentucky interpret tangible property to include digital products because, while they can’t be touched, they can be seen or heard.
• Idaho and Indiana only tax digital goods if the buyer has a permanent right to use them. Temporary access to software or streaming services are out of their taxation sphere.
• In Colorado, digital taxes are based on delivery methods. An e-book delivered electronically may be exempt, but if stored on a flash drive, it becomes taxable.

Quick Reference: States Taxing Digital Goods, SaaS, or Streaming (as of 2025)

⚠️ Note: This list is not exhaustive and subject to change. For instance, Virginia considered a “tech tax” in 2024 and is currently reviewing modernized digital taxation measures for 2026. It is likely that definitions and taxability of SaaS and digital goods will continue to change in more states.

Why This Matters for SaaS & E-Commerce Businesses

Since Wayfair, digital sellers have struggled to determine whether their products are taxable. The trend is clear: states are saying yes.

The rapid expansion of cloud-based software, AI tools, online courses, and subscription media means tax exposure is growing for every type of digital business.

SaaS = Ongoing Tax Exposure

Software-as-a-Service (SaaS) is typically billed as a recurring subscription. That means every month, you’re generating new taxable transactions rather than just one sale. If you have customers in multiple states, those renewals can quickly trigger economic nexus.

How do states track SaaS sales? There are two different sourcing rules:

• Destination-based sourcing applies tax to where the customer uses the service.
• Origin-based sourcing applies tax where the seller operates.

The result? An automatically renewing subscription can trigger multi-state filings even if you never ship a product.

Digital Content, AI, and Online Courses Are Under New Scrutiny

Streaming platforms, digital media, and online education providers are being targeted for taxation due to their high revenue potential. Even outside the United States, digital services taxes (DSTs) are becoming commonplace. Our inner borders have started to do the same:

• Although continuing to face backlash, Maryland instituted a tax on digital advertising in 2021, which applied to the taxpayer’s global ad revenue.
• Louisiana’s 2025 sales tax expanded to include SaaS, digital products, and IT services.

Utah is taking a slightly different path. Rather than simply expanding its general tax rules for digital goods, the state’s new law creates a separate excise tax for covered entities that are already subject to Utah’s age-verification requirements for material harmful to minors. For covered transactions—such as access to digital images, digital audio-visual works, digital audio works, digital books, and gaming services, including subscriptions—Utah imposes a 2% excise tax effective October 1, 2026.

In other words, this is not just another example of digital content becoming taxable; it is a targeted tax tied to content classification, age-verification compliance, and the state’s broader enforcement framework.

Small Businesses Aren’t Exempt

Even micro-SaaS and digital creators can trigger tax obligations. Most states now use $100,000-$250,000 annual revenue thresholds, meaning recurrent clients and billings can quickly push you over the nexus mark.

How to Determine if Your Product is Taxable

Not sure where you stand? Follow these steps to identify whether your products are taxable and where you have nexus:

1. Identify customers locations (by state).
2. Check each state’s SaaS/digital tax rules via tax authority websites or private letter rulings.
3. Apply correct product tax codes if using a tax engine.
4. Maintain exemption certificates for B2B or reseller clients.
5. Register in states where you meet economic nexus thresholds.
6. Automate collection and filing to stay compliant as laws evolve.

💡Pro Tip: Out tax team can register your business in every state. See our flat-rate pricing and take the guesswork out of sales tax for good!