The Shift Toward Taxing Digital Goods and Services
Historically, state sales tax systems were designed to target tangible personal property, leaving many digital products untaxed. However, as consumer behavior and business models evolve, more states are moving to include digital goods, such as streaming content, SaaS, and cloud services, in their tax bases. This shift reflects a broader effort to modernize tax codes and address budgetary needs without increasing base tax rates.
Today, digital advertising, remote access software, online education platforms, and even NFT marketplaces are being considered for taxation in several jurisdictions.
Legal Challenges and Considerations
The move to tax digital goods and services has not been without controversy. Some businesses and industry groups argue that expanding sales tax to digital services creates an undue burden on companies operating across multiple jurisdictions. Legal challenges, such as the ongoing case in Maryland regarding digital advertising taxes, highlight the complexities in determining the taxability of digital transactions.
Moreover, certain states have encountered difficulties in defining what constitutes a taxable digital good or service. For instance, software-as-a-service (SaaS) is taxed differently across states, with some classifying it as a tangible product and others considering it a non-taxable service. This inconsistency creates challenges for businesses selling digital products nationwide.
Recent Legal Developments and Policy Challenges
Key Legal Cases
- Maryland’s Digital Advertising Tax remains under legal scrutiny. In Comptroller v. Comcast, businesses argue the tax violates the Internet Tax Freedom Act and the U.S. Constitution’s Commerce Clause. As of mid-2025, the case is pending appellate review following setbacks in the lower court for the state.
- New York’s Proposed Streaming Tax, initially introduced in 2024, stalled amid concerns over its impact on consumers and First Amendment implications. Revised legislation may resurface in 2026.
Ongoing Issues
The classification of SaaS continues to vary state-by-state. For example, below is a list of how several states generally treat sales of SaaS products:
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- Taxable as a service in Texas and Connecticut.
- Considered a non-taxable license or exempt in California (unless bundled).
- May be taxable or exempt in New Jersey, depending on delivery and use.
This lack of uniformity across states complicates compliance, especially for businesses operating nationwide.
States Expanding Digital Sales Taxation in 2025
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- Maryland: Implemented a digital advertising tax, though its legality is being challenged in court.
- New York: Proposed a tax on streaming services, which could significantly impact major providers.
- Texas: Expanded definitions now include AI-based analytics and remote platform use.
- Washington: Updated guidance covers SaaS, AI tools, and digital subscription boxes.
- Illinois: Effective since Jan 1, 2025: tax on online courses and cloud infrastructure.
- Florida: Proposed taxation of virtual event services and in-app purchases.
As more states analyze revenue potential from digital activity, legislation becomes increasingly sophisticated and aggressive in targeting new digital sectors.
Compliance Strategies for Digital Businesses
Track Multistate Nexus Expansion
With the proliferation of economic nexus rules, even limited digital sales can trigger tax collection obligations. Businesses must evaluate where they’ve established nexus via virtual presence, remote employees, or digital delivery by:
- Regularly Reviewing Tax Policies
As digital tax laws are rapidly evolving, businesses must regularly review their tax policies and be prepared to implement any necessary changes. Keeping customers informed about potential tax changes on digital purchases can also help maintain transparency.
- Monitoring AI-Driven Digital Offerings
New services, such as generative AI subscriptions, data processing platforms, and virtual co-working apps, may soon fall within taxable categories. Review your catalog regularly to assess exposure.
- Seeking Professional Tax Guidance
Especially for SaaS, PaaS, or streaming providers, working with advisors who specialize in multistate sales tax is crucial. These experts can also help document exemptions and prepare for audits in states with new tax laws.
- Educating Internal Teams
Sales, product, and finance teams should be trained in how taxability may affect pricing, invoicing, and customer communications.
The Road Ahead: Outlook for Digital Taxation
The drive to tax digital goods and services shows no signs of slowing. States are expected to push toward broader and potentially more uniform digital tax regimes. However, federal-level guidance or legal intervention may be necessary to curb patchwork rules and prevent double taxation.
International developments (e.g., OECD Pillar One tax reforms and EU digital levies) may also influence U.S. state policies in the coming years.
How Digital Taxation Affects Your Business
The inclusion of digital goods and services in state sales tax regimes reflects a long-term structural shift in how tax authorities approach revenue collection in a digital-first world. Businesses that proactively adapt by investing in compliance tools, refining taxability assessments, and staying informed about policy shifts will be better positioned to manage risk and seize growth opportunities in 2025 and beyond.
Contact Thompson Tax today for all of your sales and use tax needs. We are your Trusted Tax Advisors.