Digital Products and SaaS Sales Tax in 2026: State-by-State Breakdown
The taxation of digital products and Software-as-a-Service (SaaS) has changed dramatically in the past few years. What was once a gray area is now increasingly clear: most states tax digital goods, and the majority now tax SaaS in some form.
For businesses that buy or sell digital products, cloud software, or subscription services, understanding the current rules is essential for compliance. If you sell across state lines, you will also need to understand sales tax nexus and when registration is required. This guide provides a state-by-state breakdown of where things stand in 2026.
Digital Products Tax
Understanding the Three Categories
Before diving into state-specific rules, it is important to understand that states distinguish between three types of digital offerings, and the tax treatment can differ for each:
SaaS (Software-as-a-Service)
Cloud-based software accessed through a browser or app. The customer does not download or own the software; they subscribe to access it.
Examples: Salesforce, QuickBooks Online, Slack, Zoom, HubSpot, Adobe Creative Cloud
Downloaded Software
Software that is downloaded and installed on a local device. The customer receives a copy of the software, even if it requires activation or licensing.
Examples: Microsoft Office (perpetual license), video games downloaded from Steam, desktop applications
Digital Goods / Digital Downloads
Non-software digital products delivered electronically.
Examples: E-books, music files, movie downloads, digital art, stock photography, online courses, digital templates
| Category | Key Distinction |
|---|---|
| SaaS | Accessed remotely, no download, subscription model |
| Downloaded software | Transferred to customer's device, may be perpetual or licensed |
| Digital goods | Non-software content delivered electronically |
States often tax these three categories differently, which is why you cannot assume that a single rule applies to all digital products.
State-by-State Tax Treatment
The following table summarizes how each state with a sales tax treats SaaS, digital downloads, and their general sales tax rate as of early 2026. Because rules change frequently, always verify with the relevant state's department of revenue before making compliance decisions.
| State | General Rate | Taxes SaaS? | Taxes Digital Downloads? |
|---|---|---|---|
| Alabama | 4.0% | Yes | Yes |
| Arizona | 5.6% | Yes | Yes |
| Arkansas | 6.5% | Yes | Yes |
| California | 7.25% | No (standalone SaaS generally not taxable) | No (generally not taxable) |
| Colorado | 2.9% | Yes (as of 2024) | Yes |
| Connecticut | 6.35% | Yes (at 1% rate) | Yes |
| Florida | 6.0% | No (generally not taxable) | No (generally not taxable) |
| Georgia | 4.0% | No | Yes (limited) |
| Hawaii | 4.0% (GET) | Yes (under GET) | Yes (under GET) |
| Idaho | 6.0% | Yes | Yes |
| Illinois | 6.25% | No (generally exempt) | No (generally exempt) |
| Indiana | 7.0% | Yes | Yes |
| Iowa | 6.0% | Yes | Yes |
| Kansas | 6.5% | Yes | Yes |
| Kentucky | 6.0% | Yes | Yes |
| Louisiana | 4.45% | Yes | Yes |
| Maine | 5.5% | Yes | Yes |
| Maryland | 6.0% | Yes | Yes |
| Massachusetts | 6.25% | Yes | Yes |
| Michigan | 6.0% | No | Yes |
| Minnesota | 6.875% | Yes | Yes |
| Mississippi | 7.0% | Yes | Yes |
| Missouri | 4.225% | No | No (generally not taxable) |
| Nebraska | 5.5% | Yes | Yes |
| Nevada | 6.85% | No (most SaaS exempt) | No (generally not taxable) |
| New Jersey | 6.625% | Yes | Yes |
| New Mexico | 5.0% (GRT) | Yes (under GRT) | Yes (under GRT) |
| New York | 4.0% | Yes | Yes |
| North Carolina | 4.75% | Yes | Yes |
| North Dakota | 5.0% | Yes | Yes |
| Ohio | 5.75% | Yes | Yes |
| Oklahoma | 4.5% | Yes | Yes |
| Pennsylvania | 6.0% | Yes | Yes |
| Rhode Island | 7.0% | Yes | Yes |
| South Carolina | 6.0% | Yes | Yes |
| South Dakota | 4.5% | Yes | Yes |
| Tennessee | 7.0% | Yes | Yes |
| Texas | 6.25% | Yes | Yes |
| Utah | 6.1% | Yes | Yes |
| Vermont | 6.0% | Yes | Yes |
| Virginia | 5.3% | No (most SaaS exempt) | No (generally not taxable) |
| Washington | 6.5% | Yes | Yes |
| West Virginia | 6.0% | Yes | Yes |
| Wisconsin | 5.0% | Yes | Yes |
| Wyoming | 4.0% | Yes | Yes |
States with no general sales tax: Alaska (no state-level, but local taxes may apply), Delaware, Montana, New Hampshire, Oregon.
Important: The rates shown above are state-level only. Local taxes (county, city, special district) can add 1-5% depending on the jurisdiction. The "Taxes SaaS?" and "Taxes Digital Downloads?" columns reflect the predominant treatment, but exceptions exist based on specific product types and circumstances.
The Nuances That Matter
SaaS vs. Downloaded Software
Many states that exempt SaaS still tax downloaded software. The distinction rests on a fundamental question: Is a tangible product being transferred?
| Factor | SaaS | Downloaded Software |
|---|---|---|
| Transfer of possession | No, accessed remotely | Yes, copy transferred to device |
| Ownership | Customer subscribes | Customer may own a license |
| Location of software | Vendor's servers | Customer's device |
| Tax logic | Service (often exempt) | Tangible personal property equivalent (often taxable) |
States like California illustrate this well. Standalone SaaS accessed through a browser is generally not subject to sales tax. But if the same software is downloaded to a customer's computer, it may be treated as a taxable transfer of tangible personal property.
The "Bundled" Problem
Many modern software products blur the line between SaaS and downloadable software. Consider:
- Adobe Creative Cloud: primarily SaaS, but apps are downloaded locally
- Microsoft 365: cloud-based, but desktop apps are installed on devices
- Video games: may be streamed (SaaS-like) or downloaded
When a product has both SaaS and downloaded components, states may:
- Tax the entire transaction based on the primary component
- Tax only the downloaded portion
- Tax the full amount if downloaded software is any part of the bundle
- Apply a "true object" test to determine the primary purpose
This is one of the areas where businesses most frequently get compliance wrong.
Digital Goods: Content Type Matters
Not all digital goods are treated the same. Some states apply different rules based on the type of content:
| Content Type | Common Treatment |
|---|---|
| E-books | Taxable in most states that tax digital goods; some exempt as "reading materials" |
| Music and audio downloads | Taxable in most states that tax digital goods |
| Movie and video downloads | Taxable in most states that tax digital goods |
| Digital photographs and art | Taxable in most states; may qualify for resale exemption if used commercially |
| Online courses and training | Often exempt as educational services, but varies significantly |
| Digital templates and designs | Generally taxable where digital goods are taxed |
| NFTs and digital collectibles | Unclear in most states; a few have issued specific guidance |
Streaming vs. Downloads
An increasingly important distinction:
- Streaming (accessing content without downloading): some states treat this as a service, which may be exempt
- Downloading (receiving a permanent copy): more likely to be treated as a taxable transfer of tangible personal property
In practice, many states now tax both. But the distinction still matters in states like California and Virginia that take a narrower approach to digital taxation.
When You Need a Resale Certificate for Digital Purchases
If your business purchases digital products or SaaS subscriptions that are incorporated into products you resell, you may be able to use a resale certificate to purchase them tax-free. Here is when it applies:
Resale Certificate Applies
- You resell the digital product. For example, you purchase stock photography and include it in website design packages you sell to clients.
- The digital product becomes part of your product. You purchase digital templates that you customize and resell.
- You are a software reseller. You purchase SaaS subscriptions at wholesale and resell access to your customers.
- You integrate the digital product into a taxable product for sale. For instance, embedding licensed music in videos you sell.
Resale Certificate Does Not Apply
- Internal business use: using SaaS tools for your own operations (CRM, accounting, project management)
- Employee tools: software subscriptions for your team's productivity
- Personal use: any digital product consumed by you rather than resold
- Marketing purposes: stock photos for your own website or ads
Get Your Resale Certificate -->
Documentation Requirements
When claiming a resale exemption on digital purchases, maintain the same documentation standards as physical goods:
- Provide a valid resale certificate to the vendor
- Keep records showing how the digital product was incorporated into your resold product
- Maintain a clear audit trail connecting exempt purchases to taxable sales
The Growing Trend: States Expanding Digital Taxation
Why States Are Taxing Digital Products
The trend is clear: more states are bringing digital products into their sales tax base each year. The reasons:
| Driver | Explanation |
|---|---|
| Revenue needs | As physical retail shrinks, states need to tax what people actually buy |
| Fairness arguments | Why should a physical book be taxable but an e-book not? |
| Wayfair impact | Once states could tax remote sellers, digital products were a natural extension |
| Streamlined Sales Tax | Multi-state agreements increasingly include digital goods definitions |
| Consumer behavior | Digital spending continues to grow, making it a larger portion of the economy |
Recent Changes (2024-2026)
Several states have expanded their digital taxation in the past two years:
- Colorado began taxing SaaS and digital goods more broadly starting in 2024
- Kentucky expanded digital product taxation
- Multiple states have issued new guidance clarifying that previously gray-area digital products are taxable
- States continue to refine definitions around AI services, streaming, and cloud computing
What to Expect Going Forward
The direction is unambiguous. Expect:
- Fewer exemptions for digital products as states close revenue gaps
- Clearer definitions as states issue specific guidance for SaaS, streaming, and digital goods
- AI and cloud services to be increasingly addressed in state tax codes
- More uniformity as multi-state agreements standardize digital product taxation
- NFT and cryptocurrency taxation to become more defined
Compliance Strategies for Digital Businesses
If You Sell Digital Products or SaaS
- Classify your product accurately. Determine whether your offering is SaaS, downloaded software, or digital goods in each state.
- Register in nexus states. Economic nexus applies to digital sales just as it does to physical goods.
- Implement proper tax calculation. Use a tax engine that handles digital product taxability rules by state.
- Accept and validate resale certificates. Business customers may present certificates for legitimate resale purchases.
- Monitor law changes. Digital taxation is one of the fastest-evolving areas of sales tax.
If You Buy Digital Products or SaaS for Resale
- Determine if resale exemption applies. Are you genuinely incorporating the digital product into something you resell?
- Provide valid resale certificates to vendors. Do not pay tax on legitimate resale purchases.
- Track your digital purchases. Maintain clear records of which purchases are for resale vs. internal use.
- Use your resale certificate correctly. Claiming exemption on digital tools used internally is a common audit trigger.
Use our savings calculator to estimate how much tax-exempt purchasing could save your digital business.
If You Buy SaaS for Internal Use
In most states, SaaS purchased for your own business operations is taxable and you should be paying sales tax. If you are not being charged sales tax by your vendor, you may owe use tax, the obligation to self-assess and remit tax on purchases where the vendor did not collect.
Common Questions
"Is my Shopify subscription taxable?"
In most states that tax SaaS, yes. Shopify charges sales tax based on your billing address and the applicable state's rules. Check your invoices.
"Do I need to collect sales tax on my SaaS product?"
If you sell SaaS and have nexus (physical or economic) in a state that taxes SaaS, yes. This applies to the majority of states.
"Can I use my resale certificate for my Adobe Creative Cloud subscription?"
Only if you are genuinely reselling the output as part of a taxable product. Using Creative Cloud for your own design work does not qualify. If you use it to create designs that you sell to clients, a portion may qualify. Consult a tax professional.
"I sell e-books. Which states do I need to worry about?"
Any state where you have economic nexus and that taxes digital goods. That is the majority of states. Some states exempt digital reading materials, but this is the minority.
"What about free trials and freemium models?"
Generally, no sales tax applies to services provided for free. Tax applies when the customer begins paying. However, if the "free" tier requires payment information or automatically converts to paid, some states may treat the initial period differently.
Key Takeaways
- Most states now tax SaaS and digital downloads. The "digital products are tax-free" era is largely over.
- SaaS, downloaded software, and digital goods are taxed differently in many states. Do not assume one rule covers all three.
- California, Florida, Virginia, and a few others remain notable exceptions where SaaS is generally not taxable.
- Resale certificates apply to digital products when you are genuinely purchasing for resale, not internal use.
- The trend is toward more taxation, not less. Plan for digital products to be taxable in your compliance strategy.
Ensure Your Digital Business Is Compliant
Whether you sell SaaS, purchase digital products for resale, or both, having valid resale certificates is the foundation of proper tax-exempt purchasing.
Get Your Resale Certificate -->
Need help navigating digital product taxation for your specific situation? Contact us for personalized compliance guidance.
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- Is AI Software Taxable? Sales Tax Guide - How AI services like ChatGPT and other tools fit into the SaaS and digital product tax landscape.
- How AI Is Changing Sales Tax Compliance in 2026 - AI tools that can help you manage the complexity of multi-state digital product taxation.
- Resale Certificate for Shopify Store Owners - If you sell digital or physical products through Shopify, this guide covers your tax obligations.