In the realm of sales tax laws, most states consider "tangible personal property," such as a book or painting, taxable. This implies that if you sell a book copy, you'd apply sales tax. However, the landscape gets intricate when dealing with digital products. Are these considered tangible? Some states affirm, others negate, and some haven't yet adapted to the digital shift.
The Fundamentals of Sales Tax for Digital Creators
Sales tax represents a percentage added to a transaction by a seller, common in 46 U.S. states plus Washington D.C. Typically, "tangible personal property," like a toothbrush or a lamp, is taxable, with exemptions often granted for essentials like grocery food or medicine.
As previously mentioned, some states haven't classified digital products as taxable, while many others have introduced laws or rulings affirming their taxability.
When Must Digital Creators Collect Sales Tax?
Sellers, whether of digital or physical goods, need to collect sales tax if they meet these criteria:
They have sales tax nexus in a state.
The products they sell are taxable in their nexus state.
No one else is collecting sales tax on their behalf (Online platforms like Amazon and Etsy do this for third-party sellers).
Sales Tax Nexus
Sales tax nexus denotes a significant connection to a state. Any business, including individual creators like authors or digital artists, must collect sales tax if they have nexus in a state.
Factors that typically create sales tax nexus include:
Maintaining an office, store, or any facility in a state.
Employing staff, salespersons, or contractors in a state.
Owning a warehouse or storing inventory in a state.
Utilizing third-party affiliates or conducting temporary business (e.g., trade shows) in a state.
Economic nexus, achieved by making a certain amount of sales or transactions in a state.
While many of these factors might not pertain to digital creators, a seller always has nexus in the state where they conduct business, even if it's just from a home office. Growing a business, hiring employees in other states, or selling tangible goods stored in warehouses all create sales tax nexus.
Since the 2018 Supreme Court ruling in South Dakota v. Wayfair, retailers grossing a certain amount or completing a certain number of transactions in a state establish "economic nexus," obligating them to collect sales tax in that state, regardless of physical presence.
This ruling has implications for international sellers serving U.S. customers. Even without a physical presence, they might establish economic nexus in one or more U.S. states.
See our guide to nexus thresholds in the US
Taxability of Digital Products
Another consideration for digital creators is determining whether their sold products are taxable.
While a map outlining states' stances on taxing digital goods exists, these laws are continuously evolving. Consulting a sales tax expert for specific business inquiries is wise.
The taxability often depends on the nature of the product and its mode of sale. For example, a digital film might be taxable if purchased for permanent download but not if rented temporarily.
Likewise, the tax status of digital classes might differ based on whether they're live or pre-packaged online.
Moreover, some states exempt digital copies of non-taxable physical items, aligning with their laws on the physical item's taxability.
State laws on digital products often lag behind technological advancements, leading to discrepancies in tax regulations between states. Some have clear positions, while others are yet to make conclusive rulings.
See our guide to nexus thresholds in the US
Sales Method for Digital Products
Digital content creators selling through platforms like Kindle KDP, Etsy, or Patreon usually benefit. Most U.S. states with sales tax require major online marketplaces to collect tax for third-party sellers.
Therefore, if you sell via these platforms, you often need not collect sales tax on those sales, as the platforms usually handle it. However, verifying whether the platform indeed collects taxes on your behalf is essential before assuming exemption.
For instance, if you're based in a taxable state like Colorado and sell eBooks through Amazon (which collects sales tax) and also independently to a buyer in Colorado, you'd still be obligated to collect sales tax on the latter sale.
In essence, if you sell to a Colorado buyer via Amazon, no additional sales tax collection is required. Yet, selling independently to a Colorado-based buyer mandates tax collection.
Specific guidance exists for Patreon creators and artists utilizing non-fungible tokens (NFTs) for art sales. Additionally, information explains why major online platforms are mandated to collect sales tax on behalf of third-party sellers.
Consider partnering with us for clarity on filing requirements and what compliance obligations may be. We have the expertise in navigating the intricate landscape of sales tax laws, aiding in understanding nexus, taxability of digital goods, and obligations regarding sales tax collection. We can ensure accurate adherence to tax regulations and alleviate the complexities of sales tax management for digital content creators.
See our guide for taxability
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