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As you are likely aware, effective January 1, 2027, California and Colorado, in addition to taxing SaaS, downloaded software will also become taxable.
While downloadable apps will be subject to tax in California, downloadable content such as ebooks, songs, and video games will remain tax-free. Many teams have treated all digital products the same way for tax. But with the January 1 change, classification is about to become a lot more important.
This article will provide a framework you can use to classify the digital products you sell, understand how different states tax each type, and identify what you might need to do before the January 1 changes come into effect.
What’s the difference between digital content and downloadable software?
Digital content consists of assets that were traditionally physical goods that are now delivered electronically. This category includes products like ebooks, music, video, games, images, and online courses.
The Streamlined Sales and Use Tax Agreement (SSUTA) gives its 24 member states, including Ohio and Georgia, shared definitions for digital content. It groups digital audio works, digital audiovisual works and digital books together as “specified digital products.” Each member state still decides whether to tax each category.
Downloadable software is software the customer downloads and installs without the aid of tangible media, such as a CD-ROM. The category includes both prewritten software, which is built once, sold or licensed to many customers, and taxed like a tangible goods in most states; and custom software, which is built for one specific customer and not taxed in most states.
It’s important to note that downloadable software is distinct from SaaS. Customers purchasing or subscribing to a downloadable software product get a copy of the software and install it on their own device. SaaS providers, on the other hand, host their software and grant customers or subscribers access to it online. In many states, downloadable software and SaaS are taxed differently.
Four questions that can guide taxability decisions
If you’re not sure how to classify your digital products, here are four questions you can use to help determine which tax category they fall into.
1. What is it?
Software or content. If software, is it prewritten or custom? If content, which content category does it fall into? States often tax some content types and exempt others. Keep in mind that definitions can vary by state, so we recommend speaking with a tax professional.
2. How is it delivered?
Do customers download it, stream it, or access it through physical media? Though Utah removed this distinction for content from July 1, 2026, many states still draw it. The distinction works differently for software and content. For software, states mostly ask whether it arrives by download or on physical media, like a CD. For content, many states also ask whether it is downloaded or streamed.
3. What rights do the customers have?
Can they access it permanently, is it a subscription, or are there some other limiting conditions? Georgia, for example, taxes digital audiovisual works sold with permanent use rights.
4. Who is buying?
Is the customer a consumer or a business? Some states exempt B2B software, or apply at a reduced rate.
How states tax downloadable software
As shown by current developments in California and Colorado, taxation of downloadable software is constantly evolving.
States’ software tax rules often depend on how the software is delivered to the customer. Certain states, such as Virginia and Arkansas, tax software delivered through physical media, like a CD, but exempt software delivered through electronic download. California and Colorado have traditionally followed this approach as well, but will change from January 1, 2027.
Other states treat downloadable software as a tangible good and tax it regardless of how it’s delivered. Tennessee, for example, taxes all software sales. Illinois treats downloaded software, games, virtual currency, and in-game purchases (even when the game is free) as taxable, tangible property.
Certain states tax downloadable software based on how it’s used by the customer. Connecticut, for example, which charges 6.35% tax on software for personal use and 1% on software for business use.
What’s changing in California and Colorado?
Following SB 122, California will tax prewritten software, regardless of how it’s delivered, at 7.25% plus district taxes, with nexus starting at more than $500,000 in California sales in the current or prior calendar year. Custom software on prewritten software is still exempt.
Colorado’s HB 26-1223 makes similar changes. Software will be taxed as tangible personal property regardless of delivery method. The change is at the state level, so home-rule cities keep their own tax rules, unless they follow the state tax code. State collected cities, counties, and special districts will continue to follow the state. Custom software and negotiated licenses are still exempt.
How states tax digital content
Digital content taxation is tricky as most states’ tax laws predate the rise of digital content and sometimes stretch their tangible property rules to cover it. States define tangible digital content in different ways—SSUTA’s three categories include audio, audiovisual, and e-books, while a Colorado appeals court treated streamed video and audio as tangible because customers can see and hear them. The Colorado Supreme Court is now reviewing that decision.
Digital content rules vary just as widely. Some states, like Georgia, tax content only when buyers get permanent use rights. Other states, like Washington and Utah, tax digital content no matter how it’s delivered. In other states, such as Florida, Virginia, and California (even after SB 122), digital content is largely exempt.
The constant evolution of digital content formats has also shown that content type can determine taxation—streaming media in particular. West Virginia exempts specified digital products but taxes streaming services, while South Carolina classifies streaming as a communications service.
Bundles and hybrid products
As downloadable software and digital content are taxed in different ways across different states, bundles and hybrid products can introduce a new layer of complexity.
One subscription might include a desktop app the customer downloads, cloud features they use online, a content library, and onboarding support. Although these products fall within one subscription, they could be taxed differently across US states.
When taxable and non-taxable parts are sold together, invoicing matters. Under California’s new rules, software that’s separately stated can be taxed on its own, but a single price that bundles software with non-taxable services needs a closer look.
Product add-ons and expansions can also impact taxability. Illinois taxes in-game upsells and virtual currency even when the game itself is free, and adding a downloadable component or a content library can move an existing product into a different tax category.
Sourcing and nexus for digital sales
No matter what a state’s rules are, taxability only matters where you have nexus. Most states set economic nexus at $100,000 in sales, and California’s threshold is $500,000. In states that still count transactions, low-priced downloads can cross the line quickly. Economic nexus only matters if you don’t already have physical nexus. An employee, an office, or other physical presence in a state creates nexus no matter how little you sell there.
When you are collecting tax on digital sales, note that most states tax digital sales based on where the customer is. That can be hard, a digital customer may not provide a shipping address, and a software download can be used in several places at once. California, for example, prioritizes the billing address first, then shipping, then the payment-instrument address.
Checklist for determining digital product taxability
- List every SKU and classify it (content type, software, service, bundle).
- Note the delivery method and customer access and ownership rights for each.
- Based on these criteria, map taxability by state where you have nexus.
- Review taxability for California and Colorado before Jan 1, 2027 (Here’s a guide to help).
- Re-check taxability whenever features or pricing change.
For assistance determining taxability, you can check out Anrok’s free product taxability tool, which breaks down the landscape of digital product taxability in 2026 and helps you accurately classify your products. This guide is for informational purposes only and is not tax, legal, or accounting advice. Talk to a qualified tax professional about your specific tax needs.
