For hundreds of years, they have been known as the United States of America, but when it comes to tax, the country is neither united, nor made up of 50 states…

*Boring legal interlude*

In the US, federal law is the body of law created by the federal government for the whole country. State law is the law of each separate state, as passed by the state legislature and adjudicated by state courts. It exists in parallel, and sometimes in conflict with, US federal law.

Sales tax is not governed at the federal level, so each state can do what they want about it. Currently, 46 states and the District of Columbia have decided to impose a sales tax legislation (or something that walks and talks exactly like it). There are 4 states that don’t charge any form of sales tax (Delaware, Montana, New Hampshire and Oregon), so you don’t have to worry about these. Unfortunately, the other 47 need to be considered individually when determining your tax obligations.

Most states created their sales tax laws in the olden days, before Amazon, crypto and the multiverse. In fact, most legislation was written before the internet existed and in some southern states, the latest law pre-dates the computer! This means either states have had to update their legislation to govern the digital economy, or businesses have to analyse their tax obligations in the context of archaic laws.

States originally based their laws on physical connection to the state, known as Nexus. Previously this meant if you had a shop or employees in a state, you might have a tax problem. More recently, since eCommerce and distribution methods have opened up the world, many states extended the laws to include things like warehouses or distribution centres and can now tax you if you deliver physical goods to their state from somewhere else.

But what about the digital economy? It is now possible to sell millions of dollars of “product” across the US with no physical footprint. So-called Digital Products have created a big challenge for US states who want their piece of the pie, so most have updated their laws (or at least their interpretation thereof) to include virtual goods and services.

Therefore, even if you have no physical connection to a state, if local consumers download, subscribe to, purchase or access your digital products, you might have sales tax obligations. States have the option to include Digital Products in the economic nexus calculation, and at the time of writing, 35 of the 47 states who have sales tax has confirmed that some Digital Products are taxable and subject to nexus assessment.

It’s hard for states to keep up with the tech – “simple” products like computer software, eBooks and even apps have been dealt in most cases. But SaaS, PaaS and IaaS have created a real pain in the aaS for states – not to mention the whacky world of crypto and NFT’s

Because of the way sales tax laws are written, the determining factor is often not the product itself, but how it is paid for and accessed by the user. On-demand or live? Downloadable or cloud? Subscription vs. once-off purchase. There are many more considerations, and there are 35 states (and counting) to consider.

The point is, it’s hard. And once you have solved the mystery of whether your Digital Product is taxable, there are at least 35 different sets of tax rules to understand and comply with. You’ll need some help.