Are digital products and SaaS taxable?

There is no national standard for taxing digital products or SaaS. Some states tax both aggressively. Some exempt both entirely. Many fall somewhere in the middle, taxing downloaded software but not SaaS, or taxing streaming subscriptions but not ebooks. And a meaningful number of states are still actively revising their rules as the digital economy continues to evolve.

If you sell software, subscriptions, digital downloads, or streamed content, your taxability varies significantly by state. This is one of the few product categories where manual, state-by-state research is unavoidable.

Why digital products are treated differently than physical goods

Physical goods are tangible, states have well-established rules for taxing tangible personal property. Digital products don’t fit neatly into those categories. Early sales tax law was built around physical goods, and states have taken different positions on whether a downloaded software file is more like a product (taxable) or a service (often exempt), and whether cloud-based software you never download at all fits either category.

The result is genuine legal fragmentation. Two states can have opposite rules based on the same underlying product.

SaaS taxability by state

SaaS (Software as a Service) — cloud-based software accessed over the internet, not installed locally, is one of the most contested categories.

States that generally tax SaaS:

• Texas, taxes cloud software as a “data processing service” (at 80% of the charge)
• New York, taxes SaaS when delivered electronically
• Pennsylvania, recently expanded to include SaaS
• Washington, taxes SaaS
• Hawaii, taxes most services including SaaS
• Tennessee, taxes SaaS
• New Mexico, taxes most services
• South Carolina, taxes SaaS

States that generally exempt SaaS:

• California — SaaS is not taxable (as of current guidance; the state taxes downloaded software but not remotely accessed cloud services)
• Florida — SaaS generally exempt; some nuance for software that involves installation
• Illinois, exempts cloud software (though downloaded software is taxable)
• Virginia — SaaS is generally exempt
• Massachusetts, exempts SaaS in most cases (downloaded software is taxable)
• New Jersey, complex; generally does not tax SaaS when the vendor doesn’t install or maintain anything on-site

States with contested or evolving rules: Several states haven’t issued definitive guidance, have conflicting administrative rulings, or are actively litigating. Ohio, Georgia, and Colorado have nuanced positions that depend on the specifics of the software delivery model.

Downloaded software (perpetual licenses and one-time downloads)

Downloaded software (where the customer receives a file installed on their device) is treated more like tangible property in most states, making it more likely to be taxable than SaaS.

Generally taxable: California, Texas, New York, Washington, Illinois (unlike their SaaS treatment), Pennsylvania, and most other major states.

Generally exempt: A smaller set of states, including Florida (where the taxability depends on whether the software is custom or pre-written) and some states that define “tangible personal property” in ways that exclude electronically delivered goods.

Ebooks, streaming, and other digital goods

This category is just as fragmented:

• Ebooks: Some states treat them as taxable “specified digital products” (Washington, Tennessee, Minnesota). Others exempt them. Many haven’t issued clear guidance.
• Streaming video/music: States that tax digital goods generally tax streaming subscriptions. A few states have created specific rules for streaming.
• Online courses: Often treated as a service rather than a digital product, typically exempt in most states, but this varies.
• Digital art, templates, fonts: Treated inconsistently; most states haven’t issued specific guidance and default to general digital goods rules.

The “specified digital products” framework

Several states, including Minnesota, Wisconsin, North Dakota, and some others, adopted model language from the Streamlined Sales Tax (SST) project that defines “specified digital products” and taxes them uniformly. If a state uses this framework, the coverage is broad: downloaded software, digital audio, digital audiovisual works.

How to manage this practically

Step 1: Identify your product categories precisely. SaaS, downloaded software, streaming, ebooks, and online courses all face different rules. Don’t treat “digital products” as a single category.

Step 2: Check each state where you have nexus. Prioritize your highest-revenue states. For each state, check their department of revenue website for digital goods and software guidance. Some states publish clear taxability matrices; others require reading rulings.

Step 3: Use product tax codes designed for digital goods. Tax platforms like TaxCloud, Avalara, and TaxJar maintain digital goods product tax codes that encode the state-by-state taxability rules. Assigning the right code is far more reliable than configuring each state manually.

Step 4: Revisit annually. Digital goods tax rules are changing faster than any other product category. A state that exempted SaaS two years ago may have passed new legislation. Build an annual review into your compliance calendar.

The states that matter most for digital product revenue

State	SaaS	Downloaded software	Notes
California	Exempt	Taxable	Most CA digital sellers have asymmetric exposure
Texas	Taxable (data processing)	Taxable	80% of charge for data processing
New York	Taxable	Taxable	Broad coverage
Washington	Taxable	Taxable	Aggressive digital goods taxation
Florida	Exempt (generally)	Nuanced	Depends on delivery model
Illinois	Exempt	Taxable	SaaS/download split
Pennsylvania	Taxable	Taxable	Recently expanded

Related: Does taxability change by state for the same product?