Where is your product taxable in 2023?
Getting sales tax compliant starts with understanding where and how your product is taxable. But the way digital products like SaaS are taxed can change from state to state, and even city to city.
The maps below, created by Anrok’s team of sales tax experts, break down the landscape of digital product taxability in 2023.
Accurately classifying your product is a critical first step in getting sales tax compliant, and avoiding costly fees, penalties, and back taxes. But it’s far from easy.
As legislatures across the US and around the world rush to keep up with the pace of digital innovation, definitions of digital products like SaaS are constantly changing, with little consistency between jurisdictions.
A state might tax SaaS but not PaaS, traditional digital goods but not NFTs, or people services only when bundled with another type of digital product. Some states also tax certain digital products when sold B2B but not B2C, or vice versa.
Plus, in the US, there are hundreds of local “home-rule” jurisdictions that determine their own taxability and sales tax rates. That means a city or region could tax your digital product, even if the state does not. For example, SaaS is not taxable at the Illinois state level, but Chicago taxes SaaS and several other digital products at the city’s 9% rate.
Types of taxable digital products
While every jurisdiction has its own specific definitions, here’s a high-level overview of the different types of taxable digital products in 2023. It’s recommended to consult with a tax professional to make sure you’re accurately classifying your digital product.
- SaaS (software as a service): Subscription-based access to electronically delivered software.
- Digital goods: Typically describes traditionally physical goods now delivered electronically. This category includes products like ebooks, streaming music and video, gaming, and NFTs.
- PaaS (platform as a service): Cloud-based software bundles that include both infrastructure (servers, storage, and networking) and the middleware (development tools, business intelligence services, database management systems).
- Cloud services: Infrastructure as a service offering, providing users remote access to data center equipment and computing power.
- Digital services: A broad category that includes products like data processing, information services, domain name services, and web hosting.
- People services: A broad category that includes products like training, professional services, and implementation services, whether bundled with other digital products or sold separately.
- Downloaded software: Traditionally downloadable software that does not have a physical component (like a CD-ROM).
Getting sales tax compliant
Once you’ve identified where your product is taxable, you need to understand where your business has nexus, or enough economic or physical presence in a jurisdiction to require sales tax collection.
Every state and home-rule jurisdiction has its own thresholds for economic and physical nexus, usually a combination of sales or transaction volume and employee or office locations.
If your product is taxable in a jurisdiction and your business has crossed its nexus thresholds, you’re obligated to collect sales tax on its behalf. You’ll need to register with the jurisdiction, then calculate and collect the right sales tax on applicable transactions, remit that sales tax to the jurisdiction, and file regular sales tax returns.
It’s a lot of steps for any given jurisdiction—and digital products are taxed in dozens of states and hundreds of local cities across the US.
We’re here to help. You can see current nexus thresholds, along with sales tax rates, for every US state in Anrok’s sales tax index. And if you’re ready to start automating sales tax compliance end-to-end, get in touch with our team.