If you have an accounting client who sells digital content in the US then you are quite aware of how complicated it is to handle their taxes. One of the main things that make the taxes of digital content providers so challenging is that there are so many different types of digital content, such as movies, music, software, and e-books. Anything that is delivered online rather than shipped to a customer is considered digital content.
Along with the complication of the many different types of digital content and how it is taxed is the fact that the tax laws concerning digital products in the US vary from state to state. To help accountants with handling the taxes of their digital sellers, The Rules of Thumb blog from MoneyThumb will attempt to simplify the process with the following helpful information.
The tax authorities categorize digital products into six main groups:
- Online streaming services;
- Electronic books, like the ones available on Amazon or any other similar service;
- Digital software, both downloaded and used online;
- Digital audio content, like podcasts and the music that is downloaded from iTunes, Spotify or other services;
- Online motion pictures, like movies and TV-series.
- Other digital goods.
Some US states impose taxes on digital sales, while others keep that field tax-free. For instance, digital goods aren’t taxable in New York, Florida, California, and other 20 states that don’t impose any taxes on electronic goods. On the other hand, Texas, Pennsylvania, Wisconsin, and 24 additional states have taxes for digital products. For your convenience, we'd like to share this map with the rules of taxing digital products by state courtesy of TaxJar.com.
Also, you’re eligible to pay taxes on digital products in a state that requires those taxes if you’re physically present in that very state in any way whatsoever. This is officially called a tax nexus. It refers to any registered business feature you may have in a particular US state, from an office or a warehouse to official employees, affiliate partners etc. So even if you live in New York, but sell digital products in Texas, you are required to follow Texas tax laws on digital products.
A third thing that makes the taxation of digital products so challenging is that tax laws are regularly being revised. The taxation of digital products--when compared to the way landlocked products have been taxed forever--is still a new frontier. That means an accountant with clients selling digital products must make sure they stay up-to-date on the digital product tax laws.
If you are an accountant who has yet to be hired by a client who sells digital products you can pretty much better that sooner or later you will be; most likely sooner than later. Now is the perfect time to educate yourself on tax laws where they pertain to the sale of digital products so you will be ahead of the curve. Save this Rules of Thumb blog post from MoneyThumb, or better yet, share it to your social media page so you can refer to it later and so that your accounting peers can take advantage of it too.