Many states have turned to charging sales tax on digital downloads to pump up state revenue. On July 1, 2010 Wyoming became the latest state to begin charging 4% sales tax on digital downloads held for permanent use. And they're just one of many states that tax downloads. New Jersey was the first state to tax digital products in 2007, and each year the list of states grows. These types of sales taxes are levied on downloads of digital audio, video, ebooks, ringtones, and other digital products. Downloaded software or software updates are generally subject to separate, more complex rules.
States That Tax Downloads
These states have passed laws that impose sales taxes on digital products (keep in mind that digital products are defined differently in each state and some states tax only certain digital products and exempt others):
- District of Columbia
- New Jersey
- New Mexico
- North Carolina
- South Dakota
- Rhode Island
Why Didn't They Charge Me for the Tax?
If your state made the list you may or may not see a sales tax charge when you download digital products because many online retailers will not have to collect taxes in every state that taxes digital downloads. This is because of a legal concept called nexus, which generally says that a state can only tax businesses that have a physical presence in the state (although each state defines “physical presence” differently). So, even though a state law may require retailers to charge sales tax on digital products, iTunes, Amazon, and other online retailers are only required to collect and remit sales taxes in states where they have nexus.
Consumers are, however, still liable for the taxes. Most state income tax returns will ask consumers to report and pay taxes on items they bought online, including downloads in states where they are taxable. Whether or not people will actually do this, is another story.