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Three Sales Tax Things You Should Know About...Taxation of Digital Goods

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As businesses of all sizes continue to move away from “hard copies” and into electronic communications, the taxation of Digital Goods becomes an increasingly important budget item. Here are three things you should know about the taxation of digital goods.

 

1. What are Digital Goods?
Businesses of all sizes are turning to digital goods as the best tools to streamline operations. Any item stored electronically in a file is considered a digital good. Examples include training manuals, maintenance agreements, accounting software and design templates. If information is stored, delivered and used in electronic form, it is considered a digital good.

2. How do states define Digital Goods?
States with sales tax generally apply this tax to the sales of tangible personal property as well as some services. Do digital goods fall into the property or services bucket? Does it make a difference if the digital goods are downloaded or streamed? The answer is D.O.T.S.—Depends on the State. As with all sales and use tax issues, each state has its own set of rules when applying sales tax to these products and services.

3. How should a company source a Digital Good?
Most states do not have clear directives for sourcing the sale of digital goods. Should it be sourced as a tangible personal property or a service? What if the goods are downloaded or streamed using a mobile device in other jurisdictions? What if multiple users are downloading the goods? The fact that digital goods do not neatly fit into the definition of tangible personal property causes many sourcing problems.

More people are recognizing that the taxation of digital goods needs to be more thoroughly examined. In fact, the Digital Goods and Services Tax Fairness Act of 2013 seeks to address some of these issues. Keep your eyes open for debate on this topic.

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Lauren Stinson, CMI
Written by Lauren Stinson, CMI

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