Digital transmissions produce significant tax savings.

• Author: Tapajna, Joseph J.
• Position: Digital products exempt from state sales taxes

Before delivery of items sold over the Internet, taxpayers should consider whether they can transfer these products electronically. In many states, software, books, music, videos and almost anything that lends itself to digitization might not be subject to sales tax if the transfer is properly structured.

With the Internet came the creation of a new medium of transacting business and delivering products--the digital transmission of data. Products that just a few years ago required a physical transfer from seller to purchaser now may be sold and acquired with the click of a mouse, bypassing traditional methods of delivery (and possibly taxation, as well).

States generally impose sales and use tax (the single largest source of state and local revenue in the U.S.) on retailers for the privilege of making in-state sales of tangible personal property. They do not treat tangible personal property sold over the Internet any differently than the same property sold in a store, over the phone or through a catalog. When the property is something other than tangible (such as digital software), the sale may escape traditional definitions of taxable property in some states' tax laws. Many states have not directly addressed the taxability of digital transmissions. Those that have are inconsistent in applying tax distinctions, and have tried to categorize electronic commerce transactions under existing definitions.

Tangible vs. Intangible

In some jurisdictions, software or other information downloadable electronically is taxable; in others, only software deliverable via a traditional tangible medium is subject to sales tax. For example, California does not tax electronic delivery of software, provided the transfer does not involve the exchange of tangible personal property. In other words, a seller cannot give a purchaser a master disc or other tangible materials. Similarly, Pennsylvania does not subject on-line sales of digitized products to sales and use tax, because of its determination that digital products do not possess tangible qualities.

In New York, there is no sales and use tax on interactive educational resources that retailers sell via the Internet. While there is tax on tangible custom computer artwork (such as on a disc), such artwork is considered intangible property and not subject to tax when a retailer transmits it electronically. On the other hand, the Connecticut...