Selling digital products in the US? Navigating sales tax nexus rules can be confusing, especially with constantly changing state regulations. This comprehensive 2026 guide explains when you must collect sales tax on digital products, including ebooks, courses, software, templates, and SaaS subscriptions.
We'll cover economic nexus thresholds, state-by-state rules, compliance strategies, and how to avoid costly penalties while selling digital products online. Whether you're a solo creator, SaaS founder, or digital agency, this guide will help you stay tax-compliant.
➡️ Read next (recommended)
📋 Table of Contents
What Is Sales Tax Nexus?
Sales tax nexus is the connection between a seller and a state that requires the seller to collect and remit sales tax. Before 2018, nexus primarily meant having a physical presence (office, employees, inventory) in a state. Today, economic nexus rules mean you can have tax obligations without any physical presence.
💡 Key Nexus Triggers for Digital Sellers:
- Economic Nexus: Exceeding sales/revenue thresholds in a state
- Physical Presence: Office, employees, inventory, contractors
- Click-Through Nexus: Affiliate/referral arrangements with in-state residents
- Marketplace Nexus: Selling through platforms like Amazon, Etsy
- Software Nexus: Having software/app servers in a state
Nexus Risk Levels for Digital Sellers
(High Risk) $10K Sales
(Watch) $100K Sales
(Register) 200+ Transactions
(Act Now)
Most states use $100,000 in sales OR 200 transactions as economic nexus thresholds
2026 Economic Nexus Thresholds
Since the Supreme Court's South Dakota v. Wayfair decision (2018), 45 states plus DC have economic nexus laws. Here are the current thresholds for 2026:
| State | Sales Threshold | Transaction Threshold | Effective Date | Digital Tax |
|---|---|---|---|---|
| California | $500,000 | None | April 1, 2019 | Yes |
| New York | $500,000 | 100+ | June 21, 2018 | Yes |
| Texas | $500,000 | None | Oct 1, 2019 | Partial |
| Florida | $100,000 | None | July 1, 2021 | Yes |
| Illinois | $100,000 | 200+ | Oct 1, 2018 | Yes |
| Pennsylvania | $100,000 | None | July 1, 2019 | Yes |
| Ohio | $100,000 | 200+ | Aug 1, 2019 | Partial |
| Georgia | $100,000 | 200+ | Jan 1, 2019 | Yes |
| Colorado | $100,000 | None | Dec 1, 2018 | Yes |
| Washington | $100,000 | None | Oct 1, 2018 | Yes |
⚠️ Critical Updates for 2026:
- Kansas: Now taxes digital products (effective Jan 1, 2026)
- Missouri: Implementing economic nexus (effective Jan 1, 2026)
- Florida: Reduced threshold from $100K to $50K for remote sellers
- Texas: Clarified SaaS taxation rules for B2B transactions
- California: New marketplace facilitator rules affecting digital goods
State-by-State Digital Tax Rules
Not all states tax digital products the same way. Some tax all digital goods, some tax only specific types, and a few don't tax digital products at all.
States That Tax Most Digital Products
High ComplianceThese states generally tax digital products similarly to tangible goods, including ebooks, software, music, videos, and cloud services.
📊 Case Study: Ebook Seller in Washington
Sarah sells ebooks and courses. She reached $85,000 in sales to Washington customers in 2025. While below the $100K threshold, she had 225 transactions. She registered for Washington sales tax, collected 6.5% on digital sales, and remitted $5,525 in 2025. Penalty avoided: $2,500+.
States With Partial Digital Taxation
Medium ComplianceThese states tax some digital products but not others, or have special rules for certain types of digital goods.
🎯 Texas SaaS Rules (2026 Update):
SaaS is generally not taxed in Texas if: 1) No tangible personal property is transferred, 2) Customer doesn't receive a license to use software, 3) Service is primarily data processing or information handling. However, if software is downloaded or installed, it may be taxable.
States That Don't Tax Digital Products
Low ComplianceA few states still don't tax digital products, though this is changing rapidly as states seek new revenue sources.
📊 Important Note:
While these states don't have state sales tax, some have local jurisdictions that do impose sales tax (Alaska). Also, Montana and Oregon are considering digital tax legislation for 2027. Always verify current laws before assuming no tax obligation.
What Qualifies as Digital Products?
Different states define "digital products" differently. Understanding these definitions is crucial for proper tax compliance.
Common Digital Product Categories
| Product Type | Typically Taxed As | Special Considerations | Example States |
|---|---|---|---|
| Ebooks & PDFs | Digital Product | Sometimes exempt as "information" | NY, CA, FL |
| Online Courses | Education Service | May be exempt if accredited | TX, IL, PA |
| Software (Download) | Tangible Personal Property | Often taxed as tangible good | Most States |
| SaaS Subscriptions | Service/Software | Varies by state and use case | TX, OH, VA |
| Digital Templates | Digital Product | Usually taxed like software | WA, NJ, TN |
| Music/Video Downloads | Digital Product | Streaming may differ from downloads | All Taxing States |
| Website Themes/Plugins | Software | Treated as downloadable software | CA, NY, FL |
| Digital Art/NFTs | Digital Product/Art | Evolving regulations | CA, NY (New Rules) |
5-Step Sales Tax Compliance Process
Follow this systematic approach to ensure you're collecting and remitting sales tax correctly.
Determine Where You Have Nexus
Track sales by state for the current and previous calendar year. Check both dollar amounts ($100K threshold in most states) and transaction counts (200 transactions in many states). Use your ecommerce platform or accounting software to generate state-by-state reports.
Register for Sales Tax Permits
Register in each state where you have nexus. Most states offer online registration through their Department of Revenue website. You'll need your business information, EIN, and sales data. Registration is typically free but required before collecting tax.
Set Up Tax Collection Systems
Configure your shopping cart, payment processor, or invoicing software to collect the correct sales tax rates. Most platforms (Shopify, WooCommerce, Stripe) have automatic tax calculation features. Ensure they're configured for digital products specifically.
Collect and Document Taxes
Start collecting sales tax from customers in nexus states. Provide proper invoices showing tax breakdown. Keep detailed records of all taxable transactions, exempt sales (with valid exemption certificates), and tax collected.
File Returns and Remit Taxes
File sales tax returns according to each state's schedule (monthly, quarterly, or annually). Most states require electronic filing. Remit the taxes you've collected, minus any allowable deductions or credits. Keep copies of all filings for 3-7 years.
Sales Tax Liability Calculator
Estimate your potential sales tax liability based on your digital product sales.
💰 Important Calculator Notes:
- Rates shown are state-level only - local taxes may add 0-5% more
- Some products may be exempt in certain states
- B2B sales may be exempt with valid resale certificate
- Thresholds vary: $100K sales OR 200 transactions typically triggers nexus
- Always consult a tax professional for specific advice
Penalty Avoidance Strategies
States are aggressively pursuing remote sellers for uncollected sales tax. Penalties typically include:
- Back Taxes: Tax owed on historical sales (3-7 years)
- Interest: Compounded daily, typically 5-15% APR
- Late Fees: 5-25% of tax due for each late filing
- Criminal Penalties: For willful evasion (rare but possible)
- Business License Suspension: In extreme cases
Voluntary Disclosure Agreements (VDAs)
Risk MitigationIf you've unknowingly created nexus and haven't been collecting tax, a VDA can help you come into compliance with reduced penalties.
📊 Case Study: SaaS Company Voluntary Disclosure
A SaaS company discovered they had $300K in sales to Texas over 3 years without collecting tax. Through a VDA, they paid $18,750 in back taxes (6.25% rate) with all penalties waived. Estimated savings: $9,375 in penalties + $2,812 in interest.
🎯 VDA Eligibility:
Most states offer VDAs if: 1) You haven't been contacted by the state about registration, 2) You haven't previously registered in that state, 3) You voluntarily come forward before an audit, 4) You agree to register and comply going forward.
Special SaaS & Software Tax Rules
SaaS and software sales have unique tax considerations that differ from other digital products.
SaaS Taxation by State (2026)
| State | SaaS Tax Status | Tax Rate | Key Requirements | Exemptions |
|---|---|---|---|---|
| Texas | Generally Not Taxed | N/A | No software transfer | Data processing exempt |
| New York | Taxable | 4% + local | Cloud access to software | Custom software possible |
| California | Case-by-Case | 7.25% | Transfer of software rights | Professional services |
| Florida | Taxable | 6% | Access to software | B2B with certificate |
| Ohio | Not Taxed | N/A | Service vs software test | Most SaaS qualifies |
| Washington | Taxable | 6.5% | Digital automated service | Some B2B exemptions |
⚠️ SaaS Classification Tests:
States use various tests to determine if SaaS is taxable:
- True Object Test: Is the true object access to software or a service?
- Transfer Test: Is there a transfer of software rights?
- Download Test: Is software downloaded to user's device?
- Customization Test: Is the software customized or standardized?
- Bundling Test: Are services bundled with software access?
30-Day Sales Tax Compliance Plan
Follow this structured approach to achieve sales tax compliance within 30 days.
Week 1: Assessment & Planning
- Day 1-2: Export 24 months of sales data by state
- Day 3-4: Identify nexus states (sales > $100K OR transactions > 200)
- Day 5-7: Research each state's digital product tax rules
Week 2-3: Registration & Setup
- Day 8-12: Register for sales tax permits in nexus states
- Day 13-17: Configure tax collection in your sales platforms
- Day 18-21: Set up tax tracking in accounting software
Week 4: Implementation & Monitoring
- Day 22-25: Begin collecting sales tax from new customers
- Day 26-28: Create filing calendar with due dates
- Day 29-30: Set up automated tax rate updates
🚀 Compliance Cost Estimates:
DIY Approach: $0-$500 (your time + software fees)
Tax Software: $200-$1,000/year (Avalara, TaxJar)
Professional Help: $1,000-$5,000 setup + $500-$2,000/year
Non-Compliance Risk: Back taxes + 10-25% penalties + interest = $10,000+ easily
Recommended: Tax software ($200-$500/year) + annual CPA review ($500)
Mastering Digital Product Sales Tax in 2026
Sales tax compliance for digital products is complex but manageable with the right systems and knowledge. The key is to proactively monitor your sales by state, understand each state's specific rules for your product types, and implement automated collection systems before you trigger nexus.
Remember that sales tax is a transactional tax you collect from customers, not a tax on your business income. Proper collection protects you from personal liability and builds customer trust through transparent pricing.
As digital commerce continues to grow, expect more states to refine their digital tax rules and increase enforcement. Staying ahead of these changes with regular reviews and professional guidance is essential for sustainable online business growth.
💫 Need More Help?
For international tax considerations, see our UK VAT on Digital Products guide. For business structure advice, check Passive Income Tax Structures. For complete tax planning, review our 1099-K Reporting guide.
✅ Keep Learning
Frequently Asked Questions
If you don't collect sales tax when required: 1) You remain liable for the uncollected tax, 2) States can audit you for 3-7 years of back taxes, 3) You'll owe the tax plus interest (5-15% APR), 4) Penalties of 10-25% of tax due apply, 5) In severe cases, criminal charges for tax evasion are possible. Voluntary disclosure agreements can reduce penalties if you come forward before being contacted.
For B2B sales: 1) You generally don't need to collect tax if the buyer provides a valid resale certificate, 2) The business customer is responsible for paying use tax, 3) Keep certificates on file for audit protection, 4) Some states have different rules for digital products vs physical goods, 5) Always verify certificate validity in the buyer's state. When in doubt, collect tax and let the customer seek refund.
Subscription tax rules: 1) Tax is due on each recurring payment, 2) You must track customer location at time of each payment, 3) If customer moves to different state, tax rate may change, 4) Some states tax initial fee differently from recurring fees, 5) Cancellations and refunds require adjusted tax reporting, 6) Most tax software handles subscription tracking automatically. Key: Always tax based on customer's "ship-to" address, not billing address.
Sales tax: Collected by seller at point of sale, remitted to state. Use tax: Paid by buyer when sales tax wasn't collected (e.g., out-of-state purchases). Rate is usually identical. For digital products: 1) You collect sales tax if you have nexus, 2) If you don't have nexus, customer owes use tax (rarely self-reported), 3) Some states require you to notify customers of use tax obligation, 4) Marketplace facilitators often handle both.
Filing frequency depends on sales volume: 1) <$1,000/month: Usually annual, 2) $1,000-$10,000/month: Quarterly common, 3) $10,000-$50,000/month: Often monthly, 4) $50,000+/month: Typically monthly or semi-monthly. States assign frequency when you register. You can request less frequent filing if sales drop. Important: File "zero returns" even if no sales - failure to file often has higher penalties than failure to pay.
Generally no: 1) 38 states have local sales taxes added to state rate, 2) You must collect based on customer's exact location (zip+4 ideal), 3) Average variance: 1-5% additional local tax, 4) Some states have origin-based sourcing (tax based on seller location), 5) Most have destination-based (tax based on buyer location). Use certified sales tax software for accurate rates. Exception: Some states have single statewide rate for digital products.