There has been a massive increase in the number of businesses carried out online as well as the number of digital goods bought and sold. In 2014, online commerce was $71.9billion, a 2.5% increase from the previous year, and the amount of trade has steadily increased since then.

Many people find digital goods easy and convenient to purchase, thereby making it a booming market. When compared to physical products, digital goods are easier to handle and faster to transport, requiring only bandwidth and digital payment systems.

But what are digital goods? What products qualify as digital goods? Are all goods sold on the internet digital goods? Places like Amazon and Alibaba, do they sell only digital goods?

Tax on Digital Goods in the USA

In answering these questions, it’s best we defined what a digital good is.

Digital goods or products are intangible (non-physical) goods that exist in electronic or digital format. These goods are delivered to the customers electronically through online downloads or emails, or cloud storage systems.

However, the definitions of digital goods vary with different states. These varying definitions still fall within the basic umbrella of its “intangible goods.”

What causes the variations though, are the goods or products that are taxed.

In the United States, not all states have laws that tax digital products. Out of 50 states, 27 states tax on digital goods while the remaining 23 don’t tax on these goods.

By various definitions, there are six types of digital goods:

  1. Online Data processing services
  2. Downloaded software
  3. Downloaded books
  4. Downloaded audio files.
  5. Downloaded video and other digital files such as Netflix.
  6. Other downloaded electronic goods.

Digital goods and products are taxed differently by states. The percentage tax ranges from 1% to 7% based on the state and the type of digital product.

The twenty-seven (27) states that tax on digital goods includes:

Alabama, Arizona, Colorado, Connecticut, Hawaii, Idaho, Indiana, Iowa, Kentucky, Louisiana, Maine, Minnesota, Mississippi, Nebraska, New Jersey, New Mexico, North Carolina, Ohio, Pennsylvania, South Dakota, Tennessee, Texas, Utah, Vermont, Washington, Washington DC, Wisconsin and Wyoming.

For each of these states, the definition of digital products either falls within the SST (streamlined state tax) states definitions or through guidelines adopted by the state department of revenue. Whichever definition they adopt, these states, in line with The Digital Goods and Service Fairness Tax act of 2011, have found means of taxing digital products in their different states.

The taxing of digital products by the government of these states have not been without criticisms. These criticisms stem from:

  • the ambiguity and complexity of what is defined as a digital good;
  • the basis for taxing certain goods higher than others.

Still, the has been significant progress with the taxing of digital products in the United States. These strides have not been lost on other nations as they’re taking lessons on how to effectively tax digital products.

While they are at it, having a clear-cut definition for digital goods would go a long way in easing the complexity involved with its taxing.