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Sales Tax On Digital Goods By State

The sales tax regulations were formulated in different US states well before the wide use of computers and the internet. As a result, these statutes could not address the issue of taxation on digital goods and services.

However, in the past 25 years, the sales taxation of digital goods has turned out as one of the most prominent and debatable issues in state taxation. That’s because of the rapid growth of digital commerce and the peculiar challenge of imposing taxes on sales of non-tangible goods or services.

US states generally levy tax on all tangible personal property (TPP) unless such a property is exempted by law, and tax specifically enumerated services.

However, with the onset of digital commerce, many digital products did not fit into current sales tax rules of taxing tangible property. To address some of these administrative complexities of imposing a sales tax on digital products, the Streamlined Sales and Use Tax Agreement (SSUTA) was put in place in 2005.

Soon after the agreement came into effect, the SSUTA member states started taxing some of the digital products. Note that the SSUTA agreement does not provide regulations to the states on the type of digital products that must be included or excluded from the state sales tax base. Rather, the agreement provides uniform rules that a state must adopt should it decide to tax digital products.

But in 2007, the SSUTA was amended. It mandated the member states to adopt the SSUTA’s language over the state’s definition of tangible personal property when including certain digital products in its sales tax base. However, it also gave leeway to the member states to include or exclude certain products from taxation based on their own rules. This complicated the sales tax treatment of digital products all the more.

All this indicates that taxing digital products is not straightforward. In this article, we are going to discuss in detail what are digital goods as per SSUTA and what were the key issues about the sales taxation of digital products. Then, we will explain how you need to treat the sales tax on digital goods by state as an eCommerce seller.

What are Digital Products?

As per the SSUTA, the specified digital products include the following:

1. Digital Audio Visual Works

“Digital Audio Visual Works” refer to electronic works that incorporate a series of related images that, when shown in succession, impart an impression of motion, together with accompanying sounds. Products within this definition include movies, motion pictures, musical videos, news and entertainment programs, and live events. Further, the “Digital Audio Visual Works” definition shall not include video greeting cards or video or electronic games.

2. Digital Audio Works

The term “Digital Audio Works” refers to the works that result from the fixation of a series of musical, spoken, or other sounds, including ringtones. Products within this definition include recorded or live songs, music, readings of books or other written materials, speeches or ringtones, or other sound recordings.

Note that a “ringtone” is a digitized sound file that is downloaded onto a device and that may be used to alert the customer concerning a communication.

Further, the term “ringtone” does not include “ringback tones” or other digital audio files that are not stored on the purchaser’s communications device.

Also the term “Digital Audio Works” shall not include audio greeting cards sent by electronic mail.

3. Digital Books

The term “Digital Books” refers to the works that are generally recognized in the ordinary and usual sense as books. Products within this definition include any literary work other than “digital audio-visual works” or “digital audio works,” that is expressed in words, numbers, or other verbal or numerical symbols. Provided the product is generally recognized in the ordinary and usual sense as a “ book”.

Note that the term “Digital Books” includes works of fiction, nonfiction, and short stories. However, it does not include periodicals, magazines, newspapers, or other news or information products, chat rooms, or weblogs.

4. Transferred Electronically

“Transferred Electronically” means works that a buyer obtains through means other than tangible storage media. As per the definition of this term, a copy of the product need not be physically transferred to the buyer mandatorily. As long as the buyer may access the product, it will be considered to have been electronically transferred to the buyer.

Alan Chen, CPA at Freecashflow.io, helping eCommerce businesses with their tax and accounting

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Scenario of State Taxation of Digital Goods and Services

The US states do not define digital products and services with consistency or specificity. Due to the inability on the part of the states to draw a clear distinction between digital goods and services, taxpayers are unable to get clarity on the taxability of digital products.

In the digital economy, most of the value that was previously captured in goods in the industrial economy is now transferred digitally in ways invisible to the eye. Apart from goods, many services have been digitized or automated.

As a result, the state tax authorities have been facing difficulties in defining digital goods and services precisely. Take for instance Netflix. The state authorities face challenges in defining precisely whether the streaming videos are digital goods or services and whether they should be taxed.

In addition to this, what makes the matter regarding sales taxation of digital goods all the more complex is the manner in which the states have been taxing goods and services. Traditionally, states have been taxing goods but not services unless enumerated as taxable.

Besides this, two states, Arizona and Missouri, have passed constitutional amendments prohibiting the taxation of any new services.

Thus, at present, whatever information we have about digital goods and types of digital goods is either provided in the Streamlined Sales and Use Tax Agreement (SSUTA), in states’ specific legislature, and in prominent cases addressing the taxability of digital goods.

Therefore, the ultimate challenge that the state tax authorities have been facing is whether digital goods are a subset of tangible personal property or whether they should be separately defined and regulated.

If the latter is true, then the state tax authorities must define what are the types of digital goods, and should they tax them differently?

Let’s understand what is the regulatory landscape regarding the taxation of digital goods in different states in the US. This will help you as a taxpayer get clarity on how you need to tax digital goods in different US states.

We will try to understand the regulatory landscape from the point of view of the following factors: Type of Digital Goods, Digital Goods as Classified by SSUTA, Digital Goods As Defined By State Statutes, and Software and Digital Goods As Defined By Law.

I. Type of Digital Goods in General

Digital e-commerce covers a variety of goods, including video, audio, cloud computing, information services, data processing, and any website where payment is required for username access and subscription.

Many would consider this definition as too simple and may question putting software and movies or books in the same category.

To define digital goods precisely, the states have come up with many different classifications of digital goods. Let’s consider how five sample states including South Dakota, Tennessee, Texas, Washington, and Wisconsin define digital goods. This will help us understand how each state has its own sales tax rules for digital goods.

Let’s consider South Dakota first.

South Dakota

South Dakota taxes tangible personal property. As defined by the statute, tangible personal property includes electricity, water, gas, steam, and pre-written computer software.

Besides this, South Dakota taxes “product transferred electronically” separately. However, the state fails to differentiate between software, music, and videos. As a result, it puts all of these goods in one category irrespective of the fact whether such goods are provided for temporary or permanent use.

Tennessee

Then Tennessee sales taxation rules follow a more detailed approach to taxing most digital goods. It exempts certain digital goods from sales taxation.

Texas

The Texas sales taxation rules follow yet another approach to the taxation of digital goods. This approach focuses on types of services more than types of digital products.

Texas states in its statute that “the sale or use of a taxable item in electronic form instead of on physical media does not alter the item’s tax status”. It maintains that the state will tax the digital distribution of video programming to buyers delivered by any means either now in existence or that may be developed in the future.

Thus, Texas focuses on digital services. It defines digital services as either data processing or information services that are separate from professional services.

Now as per the statute, one may perform digital service with a computer using data or using a computer as a tool. In case these definitions do not help the taxpayers in clarifying the differences between data processing services and professional services, they must contact the tax authorities.

Washington

Washington sales taxation regulation follows a more sophisticated model to define digital goods. It defines the term “digital products” separately as a broader category and points out the differences between downloaded goods and streamed goods as well as digital automated services.

Furthermore, Washington also highlights the difference between these digital services and professional and nontaxable services.

Unlike Texas, Washington excludes data processing services from the definition of what it deems taxable automated services.

Wisconsin

Wisconsin taxes digital goods, except for software as a service (SaaS). But unlike South Dakota, Wisconsin does not treat software and music downloads similarly.

Accordingly, the Wisconsin statute says that electronic delivery of software refers to the downloading of software only. It does not include accessing software. Whereas, electronic transfer of digital goods includes either downloading or accessing.

As per the Wisconsin sales tax laws, the term “transferred electronically” applies to digital goods. Whereas, the term “delivered electronically” applies to prewritten computer software. Further, for sales tax purposes, Wisconsin treats the prewritten computer software delivered electronically as tangible personal property and not a digital good.

Thus, when we analyze these sample states, we get to know how important it is for state legislatures to update their tax laws in terms of modern technology. The policy regarding the taxation of digital goods must consider whether:

  • Value delivered digitally is a product or a service
  • Software should be treated differently from digitally delivered content
  • There should be a difference in tax treatment based on whether the software or content is digitally downloaded or merely accessed;
  • It makes sense to differentiate streaming of live content from recorded content and to further differentiate between types of digital content.

Further, digital products must be distinguished from professional services. Also, digital goods can be sold in a bundle along with digital services. Thus, it is important for state statutes to define the following digital goods separately:

  • Digital content
  • Digital processes
  • Digital platforms
  • Digital marketplaces
  • Digital payment methods or currency;
  • Digital highways, internet communications, exchanges, etc

In addition to this, the policymakers must also question whether:

  • Software is like a movie film and should be treated the same or differently for tax purposes;
  • Software is like digital audio or video works and should be treated the same or differently for tax purposes
  • It makes sense to differentiate between customized and canned software
  • The delivery of digital content on a permanent or less-than-permanent basis should make a difference
  • The method of delivery of software or digital content should make a difference
  • Digital content should be treated differently depending on whether it is data, creative content, or an algorithm; and
  • The purchase or rental of storage for various digital data is also the purchase or rental of a product or service and under what circumstances

II. Digital Goods As Per SSUTA

24 out of 50 states and the District of Columbia are members of the SSUTA. The primary objective of the agreement is to provide consistent definitions of goods and services, stipulating whether they are either taxable or tax-exempt, and uniform sourcing rules. However, the member states can further supplement the definitions.

The 24 SSUTA states include Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island, Tennessee, South Dakota, Utah, Vermont, Washington, West Virginia, Wisconsin, and Wyoming.

As per SSUTA, the digital products are structured in the following manner for tax purposes:

  • Computer Software
    • Prewritten Software or Customized Software
    • Delivered electronically or via load and leave
  • Software Maintenance
    • Mandatory or Optional
    • Provides only updates and upgrades, or updates, upgrades, and support services
  • Specified Digital Products or Products Transferred Electronically
    • Digital audiovisual works, digital audio works, digital books
    • Sold to users other than the end user
    • With rights for permanent use or right of use less than the permanent use
    • With rights of use conditioned upon continued payments

To understand what are the tax implications of the transactions involving computer software, it is first important to understand the definition of computer software as per SSUTA.

Definitions of Computer Software

1. Computer Software

“Computer software” is a set of instructions existing in the form of machine-readable or human-readable code, recorded on a physical or electronic medium. Such a code directs the operation of a computer system or other machinery or equipment.

Further, the “Computer software” includes the associated documentation describing the code and its use, operation, and maintenance. Such documentation is provided with the code to the user. Note that the definition of “Computer Software” does not include databases.

2. Custom Computer Software

The term “Custom Computer Software” is one that is designed to meet the specific requirements of a single person or a small group of persons. Since it’s custom software, it includes modifications to canned computer software. Further, the user, the outside developers, or both can develop the custom software in-house.

3. Canned Computer Software

“Canned Computer Software,” sometimes also called prewritten or standard software, is computer software that is designed for and distributed “as is” for multiple persons. These persons can use the software without modifying its code. Thus, canned computer software is considered custom computer software.

What About Cloud Computing?

The cloud computing service offerings continue to increase rapidly. However, the states in the US have been slow in addressing the challenges regarding the imposition of sales tax on the different types of cloud computing models.

Due to the lack of discrete sales tax regulations regarding cloud computing, many state sales tax authorities in the US depend upon letter rulings, administrative notices, and audits to define their policy concerning the treatment of sales tax on cloud computing service offerings.

Note that each state has its own sales tax rules. Thus, it’s important for taxpayers to understand what is cloud computing and how each state treats sales tax on cloud computing services.

What is Cloud Computing?

As per the National Institute of Standards and Technology (NIST), cloud computing is a model for enabling ubiquitous, convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications, and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction.

Cloud infrastructure is the collection of hardware and software that empower the five essential characteristics of cloud computing.

One can view cloud infrastructure as having two layers: one is the physical layer and the other is the abstraction layer. The physical layer includes the hardware resources that are essential to support the cloud services. Hardware typically includes server, storage, and network components.

The abstraction layer consists of the software deployed across the physical layer, which demonstrates the essential cloud characteristics. For your information, the abstraction layer sits above the physical layer.

Further, the cloud model comprises five essential characteristics, three service models, and four deployment models.

The five essential characteristics of cloud computing include:

  • On-Demand self-service
  • Broad network access
  • Resource pooling
  • Rapid elasticity or expansion, and
  • Measured service

Whereas, the three “service models” include Software-as-a-Service (SaaS), Platform-as-a-Service (PaaS), and Infrastructure-as-a-Service (IaaS). The four deployment models include private cloud, community cloud, public cloud, and hybrid cloud. For detailed information on the essential characteristics of the cloud model, service models, and deployment models, check out the document on NIST Definition of Cloud Computing here.

As it is clear from the above definitions, all you require as a user to access the cloud-based software is the internet and the capability to log into the system via a web browser. It really doesn’t matter what device you use or where you are. As long as you have an internet connection, you can access the cloud-based software on your device.

With the advent of cloud computing, those using cloud-based software like Amazon Web Services (AWS), Microsoft Azure, or Google Cloud, do not have to go through the hassle of owning and operating their own hardware and software assets. Instead, they rely on these third-party cloud service providers who host their software on remote servers where they store and process their data.

Further, cloud service providers offer cloud computing services based on three service models each one having distinct characteristics. These include Software-as-a-Service (SaaS), Platform-as-a-Service (PaaS), and Infrastructure-as-a-Service (IaaS).

Software-as-a-Service (SaaS)

Providers of SaaS offer customers the capability to use software applications running on a cloud infrastructure. The customers can access these applications from various client devices through either a web browser or a program interface. Furthermore, in SaaS, the consumer does not manage or control the underlying cloud infrastructure including network, servers, operating systems, storage, or even individual application capabilities.

Infrastructure-as-a-Service (IaaS)

Providers of IaaS offer customers the capability to deploy onto the cloud infrastructure consumer-created or acquired applications created using programming languages, libraries, services, and tools supported by the provider. In IaaS, the customer does not manage or control the underlying cloud infrastructure including network, servers, operating systems, or storage. However, he or she has control over the deployed applications and possibly configuration settings for the application-hosting environment.

Platform-as-a-Service (PaaS)

Providers of PaaS offer customers the capability to deploy onto the cloud infrastructure consumer-created or acquired applications created using programming languages, libraries, services, and tools supported by the provider.

In PaaS, the consumer does not manage or control the underlying cloud infrastructure including network, servers, operating systems, or storage. However, he or she has control over the deployed applications and possibly configuration settings for the application-hosting environment.

Now, the SSUTA framework is called the inventory approach of defining digital goods uniformly and using product reference codes.

The inventory approach was formulated to increase compliance and to bring uniformity in tax reporting and remittance based on clearly defined and agreed-upon codes.

Furthermore, the idea behind implementing such an approach was to digitize all the transactions, including tax compliance at the time each transaction is processed. Note that each transaction is processed based on the code of product chosen and agreed on by the parties, and verified by third parties.

Now there were some challenges with implementing the inventory approach as stated by SSUTA. Though SSUTA intends to provide uniformity or streamlined definitions, it fails to define the term “delivered electronically”. As a result, each member state has its own definition of the term.

Generally, the term “delivered electronically” in SSUTA does not cover products accessed electronically such as SaaS, remotely accessed software, or vendor-hosted software. Though, SSUTA distinguishes between goods “sold with rights of use less than permanent use” or “with rights of use conditioned on continued payment”. But these definitions apply to “specified digital goods” and not software.

Furthermore, SSUTA also does not address digital codes and numerous other digital products and information services. The member states may have agreed upon the inventory approach in general terms. However, they have not agreed on the uniform treatment of digital goods or services. In fact, it seems that no two states tax digital goods in the same way. For instance, more than a handful of states tax software and specified digital goods; about a handful of states do not tax most digital products; and many states are in between, taxing some but not all digital products.

The following table showcases the scenario of how taxation of digital goods happens in the member states under SSUTA.

Tax Software, Digital Product Some Tax Software, SaaS, Not Digital Product Some Tax Not SaaS, Digital Product Limited Tax Electronically-Delivered Software, Not Saas, Not Digital Product No Tax Tangible Media, Not SaaS, Not Digital Product
Iowa (Custom and Canned Software Taxable) West Virginia (Custom and Canned Software Taxable) Arkansas  Kansas  Georgia 
Ohio  Indiana  Michigan  Nevada 
Rhode Island  Kentucky  North Dakota Oklahoma
South Dakota  Minnesota 
Tennessee (Custom and Canned Software Taxable) New Jersey 
Utah  North Carolina 
Washington Vermont 
Nebraska (Custom and Canned Software Taxable) Wisconsin 
Wyoming

III. Digital Goods As Per State Statutes

The following table outlines the approaches that different states have adopted for taxing digital goods.

Tax

no statute

Tax software, digital product Some Tax software, SaaS, not digital product Some Tax software, not SaaS, digital product Limited Tax software, not SaaS, not digital product No Tax only tangible media, not SaaS, not digital product
Alabama (Custom and Canned Software Taxable) Connecticut (Custom and Canned Software Taxable) Massachusetts  Arkansas (SSUTA) Illinois California 
Arizona  District of Columbia (Custom and Canned Software Taxable) New York  Colorado  Kansas  Georgia 
Hawaii (Custom and Canned Software Taxable) Iowa (SSUTA) (Custom and Canned Software Taxable)  West Virginia (Custom and Canned Software Taxable) Florida  Michigan (SSUTA) Maryland 
New Mexico (SSUTA)  Nebraska (SSUTA) (Custom and Canned Software Taxable) Idaho  North Dakota Missouri 
Ohio (SSUTA)  Indiana (SSUTA)  Nevada (SSUTA)
Pennsylvania  Kentucky (SSUTA) Oklahoma (SSUTA)
Rhode Island (SSUTA)  Louisiana  Virginia
South Carolina (Custom and Canned Software Taxable) Maine 
South Dakota (SSUTA)   Minnesota (SSUTA)
Tennessee (SSUTA) (Custom and Canned Software Taxable)  Mississippi (Custom and Canned Software Taxable)
Texas (Custom and Canned Software Taxable) New Jersey (SSUTA)
Utah (SSUTA)  North Carolina (SSUTA)
Washington (SSUTA)  Vermont (SSUTA)
Wisconsin (SSUTA) 
Wyoming (SSUTA)

I. Expansion of Tangible Personal Property Definition

Traditionally, states imposed sales tax on tangible personal property and many states also taxed services. However, after the digital economy took over, one needs to see whether the states have expanded the definition of tangible personal property to include digital goods or if they have created separate categories for some or all tangible products.

Well, if one goes through the sales tax statutes of the different states, most states have expanded the definition of tangible personal property. Accordingly, they have included pre-written computer software while defining tangible personal property. But, they did not expand it to include other digital goods such as music, digital books, or movies, which are taxed as a separate category.

This means there is no consistent definition of the term “tangible personal property.” For instance, states like Hawaii, Nebraska, and New Mexico do not define tangible personal property within their sales tax statute.

Then, Mississippi defines “tangible personal property” as a property perceptible to human senses or by chemical analysis and also includes pre-written computer software.

Colorado, Maryland, Nebraska, New York, and the District of Columbia define “tangible personal property” as corporeal property or having some physical existence. Further, Colorado and New York have expanded their definition of corporeal property to include prewritten computer software.

Then, Pennsylvania refers to tangible personal property as corporeal property but broadens the term to include videos whether delivered or streamed. Louisiana refers to tangible personal property as corporeal movable property including canned computer software, electronic files, and on-demand audio and video downloads.

Further, states like Missouri and Virginia define tangible personal property by referring to a list of items referenced in a separate section.

Then 33 states define “tangible personal property” as “property that may be seen, weighed, measured, felt, or touched, or is in any other manner perceptible to the senses.” Out of these 33 states, Arizona, California, and Florida have a TPP definition that does not refer to software.

Further, states like South Carolina include some services and intangibles such as communications in the term “tangible personal property”. Then states like Alabama, Colorado, and Texas include “computer program” or “computer software” in the term “tangible personal property”.

Finally, Massachusetts declares that the transfer of standardized computer software (any electronic transfer) shall be considered a transfer of tangible personal property.

II. Treatment of Prewritten Computer Software

In the US, Twenty-eight states include “prewritten computer software” within the definition of “tangible personal property”. Yet each of these states tax pre-written computer software differently.

For example, Arkansas states that the term “computer software does not include software that is delivered electronically or by load and leave.”

Further, the state defines the term “delivered electronically” as “delivered to the purchaser by means other than tangible storage media.”

Now, most states do not follow the narrow approach of not taxing pre-written software if delivered electronically as practiced by Arkansas. For instance, New Jersey includes pre-written computer software in the definition of tangible personal property, also including if it is delivered electronically. Likewise, Indiana also includes software “electronically transferred” or via “load and leave.”

Then, Iowa separately deals with the pre-written computer software and SaaS by listing SaaS as an enumerated taxable service. However, it treats the pre-written computer software as tangible personal property. Minnesota taxes the transfer of prewritten computer software whether delivered electronically, by load and leave, or otherwise.

Then, Wisconsin includes pre-written computer software in the definition of “tangible personal property” irrespective of how it is delivered to the purchaser.

Note that the US states like Arkansas, California, Colorado, Georgia, Maryland, Missouri, Nevada, Oklahoma, and Virginia tax software, if delivered via tangible medium. Of these states, California and Missouri state that they do not tax SaaS. Then, Nevada taxes hosting and data processing services but has no guidance on SaaS.

Then there are 11 states that tax software if delivered via tangible medium or electronic delivery but indicate either directly or indirectly that they do not tax SaaS or remotely accessed software. These states include Idaho, Indiana, Kansas, Michigan, Minnesota, Mississippi, North Carolina, North Dakota, Vermont, Wisconsin, and Wyoming.

On the contrary, 12 states in the US tax software whether delivered via tangible medium, delivered electronically, or accessed as vendor-hosted software (SaaS).

Further, states including Arizona, Hawaii, New Mexico, and West Virginia tax SaaS based on nonstatutory guidance.

Then, South Carolina does not tax canned software unless delivered through tangible media. However, it would tax software accessed via the cloud as a communication service. However, New Jersey does not tax SaaS unless it qualifies as an information service.

Leaving aside these states that are on one extreme end, there are states that tax software provided such software is delivered either through tangible means or delivered electronically via download, and “load and leave” but do not clearly address SaaS. These states include Alabama, Florida, Illinois, Kentucky, Louisiana, Maine, Ohio, and South Dakota.

Then there are states that tax both custom and canned software. These include Alabama, Connecticut, the District of Columbia, Hawaii, Iowa, Mississippi, Nebraska, South Carolina, Tennessee, Texas, and West Virginia. Idaho, Indiana, and Wyoming tax Specified Digital Goods only if delivered permanently.

Other states tax digital goods whether based on permanent delivery or less-than-permanent delivery, or a usage terminable upon condition. These states include Arkansas, Iowa, Kentucky, Nebraska, and New Jersey.

Further, New Jersey, Ohio, Rhode Island, Tennessee, Utah, and Vermont tax “specified digital goods” delivered or transferred electronically. Whereas, states like the District of Columbia, Iowa, Minnesota, North Carolina, Washington, and Wisconsin tax specified digital goods whether electronically transferred or accessed.

Then, 17 states including Arkansas, Connecticut, the District of Columbia, Florida, Hawaii, Indiana, Iowa, Kansas, Kentucky, Maine, Massachusetts, Minnesota, Nebraska, Pennsylvania, South Dakota, Tennessee, and Texas tax video programming, broadcasting, cable, or television services. Further, states like Maryland or Washington tax pay per view.

Likewise, states like Arizona and Louisiana have developed theoretical structures that include taxation of digital goods which are outside the scope of commonly understood service-type transactions.

IV. Type of Digital Goods As Per Law

a. Software Viewed As Intellectual Property

One of the first debates on digital goods in the court of law was over whether the software is like a movie film. The debate was focused on whether the software is intangible, like an information service that is non-taxable, or whether it is like a film roll that is a taxable physical object. Some law courts viewed software as an information service.

b. Software Types

In an effort to find common ground in defining the different types of software, one of the law courts did not see enough tangible value in software recorded on magnetic tapes or discs. As a result, it concluded that only operating system software, not application software, should be taxed. That’s because such software is required to make the computer hardware function. Even though such software is not tangible, it enhances the value of the hardware.

Another court of law had a completely contrasting viewpoint. As a result, it differentiated between the cases in which the customer paid for customization of the program and the cases in which a program was purchased from a catalog.

c. Software as a Tangible Property Based on The Medium of Delivery

Many courts considered software similar to recorded music or video. Others viewed software as more like a service. This was on the premise that every product is the consequence of the skill and labor or services. Furthermore, many physical components used to create a product may not cost as much as the judgment and expertise of the laborers.

Then, a court pointed out that the software program was sold “off the shelf” and was not a type of personal service that could be viewed as non-taxable. Further, the court pointed out that the tape was tangible and was not different from “other taxable personal property such as films, videotapes, books, cassettes, and records.”

Then the Maryland Court undertook in-depth research to check whether treating software sold on magnetic tapes differently from a book or a movie was valid. As a result, the court concluded that whether it is recorded music or a computer program, these are sets of information in a form that, when passed over a magnetized head, cause minute currents to flow in such a way that desired physical work is accomplished. Hence, these items are taxable.

d. Software as a Tangible Product Based on Its Nature

One of the courts of law questioned whether software should be viewed as tangible personal property or intellectual property. This was kind of a game changer with regards to setting the definition for digital goods.

The court stated that the method of storing computer software was irrelevant. What was relevant was that the software buyer did not merely receive knowledge. But he or she received “a certain arrangement of matter that will make his or her computer perform a desired function”. And this arrangement of matter, physically recorded on some tangible medium, constitutes a corporeal body.

Further, the court also questioned the classification of software as custom or canned. It stated that the nature of the software is the same and that the software sold is often mixed in nature. Later on, courts concluded that software is tangible because it is the “arrangement of matter.” This was concluded despite the many arguments raised against the definition in the court.

e. Level of Usage and Control Of Software

In one of the court cases, the taxpayer and tax authority disagreed with the meaning of the term “deliver”. It also questioned whether such a term includes accessing pre-written computer software.

Finally, the court interpreted the term literally as the delivery of a physical object and tried to find out whether the taxpayer received control over the software code. After undertaking in-depth research, the court concluded that when individuals access computer software, they access the software code in a limited manner.

Thus, such limited access to the software code was not considered an exercise of a right or power incident to the ownership of that code. As a result, individuals accessing the software code did not use tangible personal property and hence owed no tax.

f. Focus on the Value Received, Not the Method Of Delivery

To define computer software, many courts of law in the US have struggled with the issue of whether the software is similar to a movie film or a record player. However, one of the law courts focused on the ultimate value delivered as sufficient proof that a customer received a tangible product rather than focusing on the method of delivery. It concluded that the method of delivery of tangible personal property would not change the taxability determination.

g. Transferring an Idea Vs Transferring a Product

There can be scenarios where a person may enter into a broader licensing agreement that authorizes it to use content in the course of its business.

For instance, a greeting card manufacturer may borrow the artwork from original artists and receive the right to reproduce and publish the images on the greeting cards.

In such cases, the purchase made by the greeting card manufacturer may be accompanied by a physical object, but the jurisdictions may see no occasion for imposing a tax as if it were the sale of a product. The jurisdictions may conclude that the greeting card manufacturer did not purchase a tangible product but indeed acquired an intangible right.

Thus, all the above factors showcase that there is no need for music, motion pictures, digital pictures, or software to be on a tangible medium in order to hear, view, or otherwise use it. These are categorized under digital goods.

The only difference is that some digital products consist of data or information that is characterized as content and is termed software. While others consist of data or information that are characterized as a process or tool that allows the processing and use of content information. Such software is called Software-as-a-Service (SaaS) as it can perform data processing functions.

Now one should not confuse SaaS with the services that are provided to develop software to fit custom needs or other professional services that many states do not tax. The term SaaS should be viewed as a type of digital good that offers not only content but also functions that could be used for content creation, development, processing, or automating tasks. Such tasks previously may have required human effort, judgment, or expertise but can now be reduced to a set of standardized instructions.

Thus, it is clear that states find it challenging to define what is the main purpose of the transaction and how intellectual property is shared or used.

As a result, many states treat the taxation of software and other digital goods in the same way. They tax digital goods based on the goods’ nature or function, their method of delivery or transfer or storage, and the level of control the recipient can exercise over the digital good.

Note that not all states use an inventory approach as determined by SSUTA to develop their regulation of digital goods and services. A few states have not defined each specified digital product as taxable within their state sales tax law and yet have been able to subject digital products to sales tax based on their laws.

For instance, Hawaii and Mexico use such an approach, where Hawaii taxes most goods and services.

Nebraska asserts that it taxes intellectual and entertainment property, which covers most digital goods. Florida can tax many digital goods by taxing communication services, and Arizona has a law under which transmission of sound is viewed as a taxable retail transaction.

Still, both software companies and entertainment companies (Netflix, Hulu, etc.) believe that they are not subject to sales tax obligations in a state unless such a state precisely defines the product, including its method of delivery.

Now such a framework complicates the ability of legislatures to respond to technological changes and keep the cost of tax administration low.

Further, such a framework focuses on the ultimate value received by the end-user rather than focusing on types of computer-related products, digital products, and the mechanisms in which they are delivered and sold.

Accordingly, if the value is in the nature of a product, it is taxed. But if it is in the nature of a professional or manual service customized for each customer, then it is not taxed.

Rather than focusing on the types of computer-related products, digital products, and the mechanisms in which they are delivered and sold, the conceptual approach would rely on the analysis of not the type of product and its sub-variety based on the method of invoicing or delivery chosen by a business but by the ultimate value received by the end-user.

If the value is in the nature of a product, it is taxed, but if it is in the nature of a professional or manual service customized for each customer it is not taxed. Note that the term “digital goods” covers the transfer of value consisting of the components of both products and services.

SSUTA Sales Taxation of Software

The SSUTA treats computer software as a separate category from digital products. It does not consider computer software as a part of digital products. As a result, each state treats transactions involving computer software differently from transactions involving digital products for sales tax purposes.

Besides this, there are other factors that complicate the matter of sales taxation on digital products by the states all the more. These include a lack of guidance on whether the method of delivery of digital goods changes their taxability; a disconnect between taxation of digital goods and “video or television programming” and “streaming services” in some jurisdictions; overwhelming statutes regarding taxation of digital goods and services; and lack of comprehensive guidance on taxation of digital goods and services.

Because of the lack of clear information on the types of digital goods and services, the US states have complicated policies regarding the taxation of digital products.

State Vs SSUTA Taxation of Computer Software

Now, the SSUTA considers “canned or prewritten computer software” as a type of “tangible personal property.” As mentioned above, relative to custom software, prewritten computer software is generally canned or off-the-shelf computer software that is not developed for a specific buyer or a group of buyers.

Now, by considering the prewritten computer software as tangible personal property, the SSUTA categorizes it as a type of personal property.

Note that as per SSUTA, personal tangible property is the one that can be seen, weighed, measured, felt, or touched, or that is in any other manner perceptible to the senses. The “Tangible personal property” includes electricity, water, gas, steam, and prewritten computer software (SSTGB, Streamline Sales, Appendix C. II, 101, 106).

So, by categorizing prewritten computer software as tangible personal property, the tax implications are significant.

Typically, every state imposing sales tax charges tax on the prewritten software. Accordingly, thirty-six states in the US impose a sales tax on prewritten software delivered both in tangible and electronic form.

Furthermore, eleven states impose a sales tax on prewritten software sold in tangible form, but not if the same software is delivered in electronic form. Note that SSUTA allows member states to exempt prewritten computer software delivered electronically or by “load and leave” from sales tax (SSTGB, Streamline Sales, Appendix C. II, 107). Here, load and leave means delivery of the computer software to the buyer by use of a tangible storage media where the tangible storage media is not physically transferred to the buyer.

Accordingly, apart from the NOMAD states, the remaining 45 states and Washington, D.C. in the US impose a tax on the transfer of prewritten software, provided such software is loaded on a CD. Note that software loaded on a CD is considered tangible property. On the contrary, 12 states exempt prewritten software delivered electronically from sales tax. This leaves 33 states and Washington, D.C., that tax prewritten software delivered electronically.

Sales Tax On Digital Goods By State

State Tax Scenario
Alabama Alabama has a narrow-to-middle base, taxing prewritten and custom software however delivered, digital products (undefined) as TPP, very limited cloud products, and a narrow set of services. Prewritten and custom computer software is taxable however delivered. (Ala. Admin Code 810-6-1-.37(4)) Digital goods are taxable as TPP. 
Arizona Arizona has a broad base, with an expansive interpretation of TPP, taxing prewritten software however delivered and most digital and cloud products. Prewritten software is taxable however delivered. (Ariz. Admin. Code § 15-5-154(B); Ariz. Admin. Code § 15-5-2342) Streaming video is taxable. (Ariz. Private Taxpayer Ruling LR14-001)
Arkansas Arkansas has a narrow base, taxing prewritten software if delivered on a tangible medium, the Streamlined suite of specified digital products, and limited services or cloud products. Prewritten software taxed as TPP if delivered in a tangible medium. (Ark. Code Ann. § 26-52-304; Ark. Rev. Legal Counsel Opinion No. 20170708) Specified digital products and digital codes are taxable. Ark. Code Ann. § 26-52-301. The ability to select songs to play on a tablet is a digital audio work and is taxable, access to games, news, and social media is not taxable. Ark. Rev. Legal Counsel Opinion No. 20160412. Digital animation and motion graphics that create an impression of motion when shown together are taxable if accompanied by sounds but not taxable if not. Ark. Rev. Legal Counsel Opinion No. 20180123.
California California has a narrow base, taxing prewritten software and digital products only if sold on a tangible medium. Narrow taxation of services. Prewritten software, including digital products, are taxable only if sold on a tangible medium. 18 Cal. Code Regs. §§ 1502(c)(1) and (f)(1)(D); California Tax Publication 109. Custom software, other than a basic operational program, is not taxed regardless of whether it is sold on a tangible medium. 18 Cal. Code Regs. § 1502(f)(2)(A).
Colorado Colorado has a narrow base, taxing certain software if delivered on a tangible medium and digital goods regardless of delivery method. Colorado taxes few cloud products and has a narrow approach to services. Prewritten software is only taxed if it is sold with a tear-open nonnegotiable license and delivered on a tangible medium. Colo. Rev. Stat. § 39-26-102(15)(c)(I)(C). Digital goods are taxed as TPP however delivered. Colo. Rev. Stat. § 39-26-102(15)(b.5)(I).
Connecticut Connecticut has a middle-to-broad base, taxing prewritten software however delivered but at a reduced rate if purchased by a business for business use, a set of digital goods similar to the Streamlined suite, and a broad set of services, including some cloud products, under “computer and data processing services.” Prewritten software is taxable as TPP however delivered. Conn. Gen. Stat. § 12-407(a)(13). Prewritten software is taxed at a 1% rate if electronically accessed by a business for use in the business. Conn. Spec. Notice SN 2019(8). Digital goods are taxable as TPP. Conn. Gen. Stat. § 12-407(a)(13).
District of Columbia D.C. has a broad base, taxing broad categories of services. The data processing category is particularly broad, and includes prewritten and custom software and software modification. Data processing also includes various cloud products. Prewritten and custom software is taxable as data processing services. 9 DCMR § 474.4. Digital goods are taxable. D.C. Code Ann. § 47-2001(n)(1)(BB). Many other services are taxable under data processing services or information services. D.C. Code Ann. § 47-2001(d-1).
Florida Florida has a narrow base, taxing prewritten software delivered in a tangible medium, digital products if sold or bundled with something tangible, few services, and few cloud products. Prewritten software supplied on a tangible medium is taxable as TPP. Electronically accessed software and “digital transmissions via the Internet” are taxable if sold as part of tangible personal property like routers, servers, etc. Fla. Tech. Assist. Adv. 98A-081; Fla. Tech. Assist. Adv. 11A-002. Digital transmission of photos and videos is not taxable. Fla. Tech. Assist. Adv. 11A-002.
Georgia Georgia has a narrow base taxing prewritten software delivered via a tangible medium, no digital products, few services, and no cloud products. Prewritten computer software is taxable when sold in a tangible medium. Ga. Comp. R. & Regs. § 560-12.2-.111(3)(a). Failure to state the method of delivery creates a presumption of a tangible medium. Ga. Comp. R. & Regs. § 560-12.2-.111(4)(a). Digital products delivered electronically are not taxable. Ga. Code Ann. § 48-8-2(33)(A). Effective January 1, 2024, the streamlined suite of digital products is taxable if transferred to an end user. Ga. Code Ann. § 48-8-30(a)(2)(A)(effective January 1, 2024).
Hawaii Hawaii has a very broad base, taxing gross receipts from nearly all activities. The imposition statute contains a catchall provision to capture any form of income not specifically exempted. Gross income from the sale of software or digital products is subject to the GET unless otherwise exempted.
Idaho Idaho has a narrow base, taxing prewritten software delivered on a tangible medium, certain digital products however delivered, few services, and few cloud products.  Prewritten software delivered via tangible medium is taxable. Id. Code § 63-3616(b). Tax imposed on digital music, digital books, digital videos, and digital games when the purchaser has a permanent right to use regardless of the delivery method. Id. Code § 63-3616(b). Other digital products are taxed if transferred on storage media retained by the user. Id. Regs. § 35.01.02.027.06.a.
Illinois Illinois has a narrow base, taxing prewritten software however delivered. Software as a service is generally not taxable unless TPP is transferred. Services are generally not taxable. Information and data accessed online or downloaded are not taxable. Prewritten software intended for general or repeated use is taxable whether delivered via a tangible medium or downloaded. 86 Ill. Admin. Code § 130.1935(a)(3). Generally, the download of information or data (books, music, newspapers, smartphone apps, streaming video) is not taxable. 86 Ill. Admin. Code § 130.2105(a)(3). License of software is not taxable if 5 criteria are met. 86 Ill. Admin. Code tit. § 130.1935(a)(1). Custom software is not taxable. See 35 ILCS 120/2-25, 35 ILCS 120/2(a).
Indiana Indiana has a narrow-to-middle base, taxing prewritten software and certain specified digital products however delivered, limited enumerated services, and few cloud products. Prewritten software is taxable as TPP however delivered. Ind. Code Ann. § 6-2.5-1-27. Specified digital products are taxable. Ind. Code Ann. § 6-2.5-4-16.4. Reports, documents, or other information delivered electronically are not taxable, those delivered via a tangible medium may be. Ind. Tax Inf. Sales Tax Bulletin 8. Information delivered via a tangible medium is taxable if the true object is the tangible medium. Ind. Rev. Rul. 2018-07ST. Digital certificates that do not contain a set of coded instructions for a computer or automatic data processing equipment to perform are not taxable. Ind. Rev. Rul. 2012-04ST.
Iowa Iowa has a middle base, taxing prewritten and custom software however delivered, the Streamlined suite of products,  information services, and SaaS. Prewritten and custom computer software are taxable as TPP however delivered. Iowa Admin. Code § 701-285.34(2)(c); Iowa Dept of Rev., Taxation of Specified Digital Products, Software, and Related Services. Specified digital products and prewritten computer software are exempt if sold to a commercial enterprise for use exclusively by the commercial enterprise. Iowa Code § 423.3(104). Digital products sold to non-end users are exempt. Non-end user means a person receiving the product for further commercial broadcast, rebroadcast, retransmission, licensing, relicensing, etc. Iowa Code § 423.3(105).
Kansas Kansas has a narrow base, taxing prewritten computer software however delivered but not taxing the Streamlined suite of digital products and taxing few services or cloud products.  Prewritten computer software is taxable however delivered. K.S.A. § 79-3603(s); Kan. Private Ltr. Rul. P-2010-009.
Kentucky Kentucky has a middle base, taxing prewritten software however delivered, the Streamlined suite of digital products, excluding digital audio-visual works, most cloud products, and limited services. Prewritten computer software is taxable however delivered. Ky. Rev. Stat. Ann. § 139.200(1)(a). Digital property is taxable. Ky. Rev. Stat. Ann. § 139.200(1)(b). Digital audio-visual works are not taxed. Ky. Rev. Stat. Ann. § 139.010(11)(b).
Louisiana Louisiana has a narrow-to-middle base, taxing prewritten and custom software however delivered, many digital items, few services, and no cloud products.  Prewritten and custom computer software is taxable however delivered. La. Rev. Stat. Ann. § 47:301(16)(e); La. Rev. Stat. Ann. § 47:321(A)(1); La. Rev. Stat. Ann. § 47:302(BB). There is an exemption for custom software that is currently suspended until June 30, 2025. La. Rev. Stat. Ann. § 47:301(16)(h). Digital or electronic products such as canned computer software, electronic files, and on-demand audio and video downloads are taxable as TPP. 61 La. Admin. § 4301 (Tangible Personal Property)(a)(iv); La. Priv. Ltr. Rul. 05-003.
Maine Maine has a narrow-to-middle base, taxing prewritten computer software however delivered but only taxing digital products if their non-digital form would be taxable as TPP. Maine taxes a narrow set of services and has no guidance on cloud products. Prewritten software is taxable however delivered. 36 Me. Rev. Stat. § 1811. Software licenses are treated like leases and are not taxable. The lessor is subject to tax on the purchase or on its own costs if the lessor is the developer. Me. Instructional Bulletin No. 20. Digital products taxed if nondigital physical form would be taxable as TPP. 36 Me. Rev. Stat. § 1752(9-E); Me. Instructional Bulletin No. 3; Me Reference Guide to the Sales and Use Tax Law (October 2019).
Maryland Maryland has a broad base, with a detailed statutory definition of digital products. Maryland provides some exemptions for business-to-business transactions. Maryland has a narrow approach to services. Prewritten software is taxable however delivered. Md. Code Ann. Tax-Gen. § 11-102(a). Prewritten software is taxable as a digital product. Maryland Tax Tip 29. Digital products and digital codes are taxable. Md. Code Ann. Tax-Gen. § 11-102(a)(2). Software purchased or licensed solely for commercial purposes in an enterprise computer system that is housed or maintained by the purchaser or on a cloud server, whether hosted by the purchaser, software vendor, or third party is not taxable. Md. Code Ann. Tax-Gen. § 11-101(c-4)(3)(vi). Custom software is not taxable even if delivered on a tangible medium. Md. Code Ann. tax-Gen. § 11-219(b). Digital products are taxable. Md. Code Ann. Tax-Gen. § 11-102(a). Digital products are not taxable if the buyer intends to resell in unchanged form; use the product in a production activity as a material or part of another digital product to be produced for sale; or transfer the product as part of a taxable service transaction. Md. Code Ann. Tax-Gen. § 11-101(h)(3))(ii).
Massachusetts Massachusetts has a narrow-to-middle base, taxing prewritten software however delivered. Digital products more generally are not subject to tax. Few services are subject to tax but all cloud products allow access to prewritten software.  Prewritten software is taxable however delivered or accessed. 830 CMR 64H.1.3(3)(a); See Citrix Systems, Inc. v. Mass. Comr. of Rev., 139 N.E.3d 293 (2020). Factors characterizing a taxable transfer of prewritten software and nontaxable sale of services provided in Massachusetts Directive 13-XX (working draft). Digital products delivered electronically are not taxable. Mass. Tech. Info. Release 05-08.
Michigan Michigan has a narrow base, taxing prewritten computer software however delivered, no digital products, a narrow set of services, and few cloud products. Prewritten computer software is taxable however delivered. Mich. Comp. Laws § 205.51a(p). Michigan is a Streamlined state but does not tax the Streamlined suite of digital products. Mich. Treas. Update – November 2015.
Minnesota Minnesota has a narrow-to-middle base, taxing prewritten software however delivered, the Streamlined suite of specified digital products, few services, and few cloud products. Prewritten software is taxable however delivered. Minn. Stat. § 297A.61(3)(f) and 61(4). Written training materials for prewritten software is taxable. Minn. R. 8130.9910(2)(D). Specified digital products are taxable. Minn. Stat. § 297A.61(3)(l). Computers and related software prescribed by a school are exempt. Mich. Stat. 297A.67(14). General, Minn. Sales Tax Fact Sheet 111.
Mississippi Mississippi has a middle-to-broad base, taxing prewritten and custom software on tangible media or downloaded, a set of digital goods similar to the Streamlined suite, a few services, and some cloud products. Prewritten and custom computer software is taxable however delivered. Computer software services are taxable. Miss. Code Ann. § 27-65-19; Miss. Code § 27-65-23; 35 Miss. Admin Code IV.05.06-201. Specified digital products are taxable if sold to an end user. Miss. Code § 27-65-26(1).
Missouri Missouri has a narrow base, taxing prewritten software if delivered in a tangible medium, digital products relating to a transfer of TPP, a narrow set of services, and no cloud products. Prewritten software delivered on a tangible medium is taxable. 12 Mo. Code Regs. Ann. § 10-109.050(3). Load and leave are not taxable, the customer must take possession. Mo. Ltr. Rul. LR7630. Digital products that relate to a transfer of TPP are taxable, including a digital membership to a wine club. Mo. Ltr. Rules. LR4859 and LR8181.
Nebraska Nebraska has a narrow-to-middle base, taxing prewritten and custom software however delivered, the Streamlined suite of products if sold to an end user, few services, and no cloud products. Prewritten and custom software is taxable however delivered. Neb. Rev. Stat. § 77-2701.16(3)(a); 316 Neb. Admin. Code 1-088.01. Digital audio works, digital audiovisual works, digital codes, and digital books, sold to an end user, are taxable if taxable in tangible form. Neb. Rev. Stat. § 77-2701.16(9).
Nevada Nevada has a narrow base, taxing prewritten software only if delivered via a tangible medium, no digital products, few services, and has provided no guidance on cloud products. Prewritten software is taxable if transferred via a tangible medium. Nev. Admin. Code § 372.880. Nevada does not tax specified digital products. Delivered electronically means delivered by means other than a tangible storage medium. Nev. Rev. Stat. § 360B.420.
New Jersey New Jersey has a narrow-to-middle base, taxing prewritten software however delivered, the Streamlined suite of digital products, few services, and no cloud products. Prewritten software is taxable however delivered. N.J. Rev. Stat. § 54:32B-2(g). Prewritten software delivered electronically is exempt if used directly and exclusively in the purchaser’s business. N.J. Rev. Stat. § 54:32B-8.56. The division treats custom software as an exempt professional service. Division policy. Specified digital products transferred electronically are taxable. N.J. Rev. Stat. § 54:32B-3(a). Specified digital products merely accessed but not delivered electronically are exempt. N.J. Rev. Stat. § 54:32B-8.62.
New Mexico New Mexico has a very broad base, taxing gross receipts from nearly all activities. Gross receipts from sales of “property” are taxable. N.M. Stat. Ann. § 7-9-3.5(A)(1). Packaged software is taxable as TPP. N.M. Admin. Code § 3.2.1.15(J). Custom software is taxed as a service. N.M. Admin. Code § 3.2.1.18(M). 
New York New York has a middle base, taxing prewritten software however delivered, taxing digital products only if sold along with something tangible, and taxing some cloud products as prewritten software. Prewritten software is taxable however delivered. N.Y. Tax Law § 1101(b)(6). Digital products are taxable if transferred along with tangible personal property. New York TSB-A-12(26)S. Online meetings, conferences, and remote access computer products are not taxable. New York TSB-A-15(28)S.
North Carolina North Carolina has a narrow-to-middle base, taxing prewritten software however delivered, the Streamlined suite of specified digital products, plus a few additional products, limited services, and no cloud products.  Prewritten computer software is taxable however delivered. N.C. Gen. Stat. § 105-164.4(a)(1)(A); N.C. Gen. Stat. § 105-164.13(43). Sales of certain digital property are taxable. N.C. Gen. Stat. § 105-164.4(a)(1)(b). Software or digital property that becomes a component part of other software or digital property is not taxable. N.C. Gen. Stat. § 105-164.13(43b).
North Dakota North Dakota has a narrow base, taxing prewritten computer software however delivered, exempting the Streamlined suite of specified digital products and any item delivered electronically, and taxing few services and no cloud products.  Prewritten computer software is taxable however delivered. N.D. Cent. Code § 57-39.2-02.1(g). Items delivered electronically, including specified digital products, are not taxable. N.D. Cent. Code § 57-39.2-04(54).
Ohio Ohio has a middle-to-broad base, taxing prewritten software however delivered, the Streamlined suite of digital products, computer services generally, and some cloud products. Prewritten software is taxable however delivered. Ohio Rev. Code Ann. § 5739.01(WW). Specified digital products are taxable. Ohio Rev. Code Ann. § 5739.01(B)(12). Streaming video is taxable. Ohio Rev. Code Ann. § 1332.21(J).
Oklahoma Oklahoma has a narrow base, taxing prewritten software delivered in a tangible medium or via load and leave, no digital products, a narrow set of services, and no cloud products. Prewritten software delivered via a tangible medium or load and leave is taxable. Okla. Admin. Code § 710:65-19-52(c); 68 Okla. Stat. Ann. § 1357(32). Digital products delivered electronically, including but not limited to, software, music, video, reading materials, or ringtones, are not taxable. 68 Okla. Stat. Ann. § 1354(A)(4)(a)(9); Okla. Admin. Code § 710:65-19-156(b)(6).
Pennsylvania Pennsylvania has a middle-to-broad base, taxing prewritten software however delivered, other undefined digital products, some enumerated services, and most cloud products. Prewritten software is taxable however delivered. 72 P. S. § 7201(m)(2)(ix). Electronically and digitally transferred products are taxable as TPP. 72 P. S. § 7201(m)(2)(x).
Rhode Island Rhode Island has a middle base, taxing prewritten software however delivered, the Streamlined suite of digital products, limited enumerated services, and some cloud products. Prewritten software is taxable however delivered. R.I. Gen. Laws § 44-18-7(14). Specified digital products are taxable including licenses, rentals, and leases of these products. Both permanent and less-than-permanent use of specified digital products is taxable. R.I. Gen. Laws § 44-18-7(16).
South Carolina South Carolina has a narrow base, taxing prewritten and custom software if delivered on a tangible medium or via load and leave, no digital goods, and some cloud products. South Carolina has a very broad definition of TPP. Prewritten and custom software are taxable if delivered on a tangible medium or through an application service provider. S.C. Code Regs. 117-330; S.C. Rev. Rul. No. RR 03-5. Tangible medium includes load and leave. S.C. Rev. Rul. No. RR 05-13. But not taxable if loaded and left over the internet. S.C. Rev. Rul. No. RR 12-1. Electronic transmission of intangible personal property, including streaming, is taxable as communications, which is considered TPP. S.C. Code Ann. § 12-36-60; S.C. Code Ann. § 12-36-910; S.C. Rev. Rul. No. RR 05-13; S.C. Rev. Rul. No. RR 16-5. Digital content downloaded is not taxable. S.C. Sales and Use Tax Manual, Winter 2021.
South Dakota South Dakota has a broad base, taxing custom and prewritten software however delivered, products delivered electronically, broadly defined, nearly all services, and all cloud products unless specifically exempted. Prewritten software is taxable as TPP however delivered. S.D. Admin. R. 64:06:02:79. Custom software is taxable as a product transferred electronically, which is treated as TPP. S.D. Tax Facts No. 267; S.D. Tax Facts – Products Transferred Electronically. Products transferred electronically are taxable whether sold to an end-user or not. S.D.C.L. Ann. § 10-45-2.4.
Tennessee Tennessee has a middle-to-broad base, taxing prewritten and custom software however delivered as well as services associated with the software. Tennessee also taxes the Streamlined suite of products and limited cloud products.  Prewritten and custom software are taxable however delivered. Tenn. Code Ann. § 67-6-231(a); Tenn. Code Ann. § 67-6-102(86)(K). Specified digital products and video game digital products are taxable. Tenn. Code Ann. § 67-6-233(a). Charges for access to online pre-recorded training courses are taxable as digital audio-visual works. Tenn. Ltr. Rul. No. 17-18. Online access to continuing education courses from exempt organizations is exempt. Tenn. Code Ann. § 67-6-329(a). Access to video content to play at customer locations that are a mix of promotional content and generic weather, news, and stock market ticker content is partly taxable, the promotional content is a digital audio-visual work and the generic content is an information service. Tenn. Rev. Rul. No. 20-03. Online fitness classes are taxable as digital audio-visual works. Tenn. Ltr. Rul. No. 23-01.
Texas Texas has a broad base, taxing canned and custom software however delivered, several services with potentially broad application to digital products, and amusement services. Digital products are not taxed as such. Prewritten and custom computer programs are taxable even if sold in an electronic form. 34 Tex. Admin. Code § 3.308(c)(1). Contract programming of custom software will not be treated as the sale of TPP if the programmer “did not sell, and retains no rights in, the computer program.” 34 Tex. Admin. Code § 3.308(a)(2) & (c)(4). The sale or use of a taxable item in electronic form instead of on physical media does not alter the item’s tax status. Tex. Tax Code Ann. § 151.010.
Utah Utah has a middle-to-broad base, taxing prewritten software however delivered, the Streamlined suite of products, only a narrow set of services, but a broad set of cloud products. Prewritten software is taxable however delivered. Utah Code Ann. § 59-12-102(98); Utah Code Ann. § 59-12-103(1). Products transferred electronically are taxable. Utah Code Ann. § 59-12-103(1)(m)(i). Digital audio works, digital audio-visual works, and digital books are taxable. Utah Code Ann. § 59-12-103(1)(m)(i)(A). 
Vermont Vermont has a narrow-to-middle base, taxing prewritten software however delivered, specified digital products, limited enumerated services, and no cloud products. Prewritten computer software is taxable however delivered. 32 Vt. Stat. Ann. § 9701(7). Specified digital products are taxable if sold to an end user. 32 Vt. Stat. Ann. § 9771(8).
Virginia Virginia has a narrow base, taxing prewritten software only if delivered in a tangible medium and no products delivered electronically. Virginia taxes a few services and no cloud products. Prewritten software is taxable if delivered on a tangible medium. Va. Code Ann. § 58.1-603; Va. Rul. of the Comm’r PD 99-7. For exemption, the invoices, contracts, or other agreements must verify the software was delivered electronically and that no TPP was furnished. Va. Rul. of the Comm’r PD 05-44. Digital products are not treated as TPP so not taxable. Va. Rul. of the Comm’r PD 13-59.
Washington Washington has a broad base, taxing prewritten software however delivered, multiple digital products, a variety of services, and some cloud products. Prewritten computer software is taxable however delivered. Wash. Rev. Code § 82.04.050(6); Wash. Admin. Code § 458-20-15502(3)(b). Digital products transferred electronically to end users are taxable. Wash. Rev. Code § 82.04.050(8)(a). See Wash. Admin. Code § 458-20-15503 for a rule with six parts meant to function as a decision tree. Altering, repairing, installing, or improving digital goods is taxable. Wash. Rev. Code § 82.04.050(2)(g). See Wash. Tax Dec. Det. Nos. 13-0339 and 14-0276.
West Virginia West Virginia has a middle base, taxing prewritten and custom software however delivered, a broad set of services, and no digital products. West Virginia has an unclear stance on cloud products. Prewritten and custom software are taxable however delivered. W. Va. Code § 11-15A-1(b)(29). Prewritten and custom software used in a high-technology business or internet advertising business are exempt. W. Va. Code § 11-15B-2(b)(60). Goods that are electronically transferred, such as digital audio or digital books, are exempt. W. Va. Code § 11-15-9h(a).
Wisconsin Wisconsin has a middle base, taxing prewritten software however delivered, the Streamlined suite of specified digital products, additional digital goods, a narrow set of services, and cloud products where the provider is providing taxable products or services. Prewritten computer software is taxable however delivered. Specified digital goods, additional digital goods, and digital codes are taxable. Wisconsin Publication 240. Exemptions that apply to tangible goods apply to digital goods. Wis. Stats. § 77.54(50).
Wyoming Wyoming has a middle base taxing prewritten software however delivered, the Streamlined suite of digital products, computer services generally, but few cloud products. Prewritten computer software is taxable however delivered. Wyo. Stat. § 39-15-101(a)(ix). Specified digital products are taxable. Specified digital products purchased for further commercial broadcast, rebroadcast, retransmission, licensing, relicensing, etc. are not taxable. Wyo. Stat. § 39-15-103(a)(i)(P).

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