States Searching for Uniform Solution to Tax Digital Products

Digital goods are currently taxed in 31 states. The large market states where such products and services are generally not subject to tax, include California, Florida, Illinois, Massachusetts, New York and Virginia. The taxes applied in the other states, take on a variety of forms, and include taxes on digital advertising in addition to tax on digital goods. Recently, some jurisdictions have proposed applying taxes to data mining activities. The expansion of state taxes to digital transactions and the non-uniformity of the taxes that are currently enacted, has led to fierce opposition from the business community. This resistance is evidenced by the ongoing litigation involving Maryland’s digital advertising tax, enacted in 2021. As a result, a variety of proposals to streamline the taxes on digital transactions, are circulating among government entities. These proposals include among other things, an expansion of the sales tax base to include digital items in states like California and Virginia, and a general proposal to define “automated digital products” that are subject to tax, as excluding business to business transactions from tax.

Conclusion

Tax practitioners and consumers alike should continue to monitor state developments geared towards expanding the sales tax base to electronic transactions that are currently untaxed.