How States Are Avoiding Square Tax Policies for Tech

States tend to be five or more years behind on new sales tax developments. Once proper guidelines have been promulgated on a new subject, the problems that were sought to be solved have often turned into something completely different.

In addition to creating an ever-evolving catch-up game by states, this environment also forces taxpayers and tax practitioners to apply square tax guidelines to evolving round-hole technology. To combat this, many states have created tax laws that are as broad as possible to deal with technological and societal changes. This is especially true for digital goods and digital products. About 31 states impose sales tax on digital goods and products in one way or another.

Perhaps the threshold question in this area is to define what the terms digital goods and digital products actually mean. As with most things in state tax, the answer is that it depends. While some states have detailed definitions of these terms, others have simply sought to impose taxation through regulation or some type of informal guidance.

Historically, many states have taken the position that if something was taxable when sold in tangible form, that item was still taxable if sold electronically. Colorado leader says“Digital documents, such as digital photographs, music, books, films and newspapers, have physical existence and are no less taxable than if they had been delivered in paper or celluloid.”

The Pennsylvania Approach

As the Internet and digital goods became more common, some states attempted to statutorily list the items they sought to tax. Pennsylvania has taken this approachspecifically listing the following as taxable tangible personal property, regardless of mode of access or delivery: videos, photos, books, applications, games, music and “any other otherwise taxable tangible personal property delivered electronically or digital”.

Obviously, updating this list as new technologies are developed can be somewhat onerous. This could be why, with respect to non-fungible tokens, instead of adding to the law, Pennsylvania simply added NFTs to its list of taxable items. by publication in a bulletin. Presumably, NFTs fall under the statutory wording regarding “any other otherwise taxable tangible personal property delivered electronically or digitally”.

Maryland in the lead

Maryland is taking the lead in taxing digital goods, though it has had its own struggles. In 2021, the state adopted HB 732, imposing a new tax on digital advertising services; and HB 932, which expanded sales and used taxation of certain digital products. Its digital advertising services tax is the first of its kind in the country, but it faces various challenges.

Maryland Legislation Taxing Digital Products includes examples of what constitutes digital codes and digital goods as well as the following fairly broad definition of a digital product: “A product that is obtained electronically by the purchaser or delivered by means other than tangible storage media through the use of technology having electrical, digital, magnetic, wireless, optical capacities. , electromagnetic or similar capabilities. This definition seems broad enough to encompass almost anything sold by means other than tangible and is a trend among states to list what you can and include definitions broad enough to encompass new or developing technologies.

To provide additional guidance, Maryland has released Tax Tip #29 — Sales of Digital Products and Digital Codes. Its details include examples of what constitutes a digital product: static and non-personalized information reports, electronic discussion forums, blogs and similar products, stock photos and illustrations. Interestingly, Maryland includes software as a service, or SaaS, in the definition of digital products, while many states define digital products outside of SaaS. Maryland then provides several exemptions related to SaaS, including one for custom software.

When Maryland’s guidelines for the Custom Exemption for SaaS were first released, there was some confusion about the scope of this exemption, particularly the degree of customization needed for the exemption to apply. . Any software other than pure plug-and-play software is considered custom software and potentially falls under the custom software exemption. Moreover, partly because of this confusion, Maryland changed the definition of what constitutes taxable SaaS and enterprise software, expanding the exemption for commercial software.

New Jersey and New York

Taxation of digital products in New Jersey is more limited than in Maryland. New Jersey only taxes specified digital products, which include “electronically transferred digital audiovisual works, digital audio works or digital books”. A digital audiovisual work is “a series of linked images which, when shown in succession, give the impression of movement, accompanied by sound”. A digital audio work is “a work which results from the fixation of a series of musical, spoken or other sounds, including a ring tone”; and an e-book is “a work that is generally recognized in the ordinary and customary sense as a book”.

Thus, it appears that New Jersey is taking a more limited or traditional approach to taxing digital goods, essentially taxing items in the digital domain that are taxable in the physical domain. New Jersey also does not generally tax SaaS, consider it more of an exempt service.

While New York is very aggressive in its taxation of SaaS and any type of electronically delivered software as well as information services, this is not the case when it comes to digital products. Typically, digital products such as ringtones, e-books, movies, and music are not subject to sales tax in New York.


States have taken various approaches to taxing digital products, and this area continues to evolve. Thus, we may continue to see states react to new technologies and the real or perceived loss of revenue associated with the growth of digital products. While it would be great to hope that states would come to some sort of one-size-fits-all approach here, that’s probably unrealistic in the immediate future.

However, we can hope that states fully consider the ramifications of the new legislation and carefully craft tax bills to achieve clarity and intended revenue targets. Clear definitions of what is taxable and what is exempt will go a long way to alleviating taxpayer angst surrounding the taxation of digital goods, even in the absence of state uniformity.

This article does not necessarily reflect the views of the Bureau of National Affairs, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Gary C.Bingel is the national and local tax partner in EisnerAmper’s national and local tax group.

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