A business that set up its digital goods taxability rules in 2023 and hasn’t touched them since is almost certainly misconfigured in at least one state. Probably several.
Sales tax on digital goods is the fastest-moving area of US consumption tax law right now. States that had no digital goods tax two years ago now tax SaaS, streaming, and downloads. States that had partial rules have expanded them. The definitions of what counts as a “digital product” differ by state, change by legislative session, and in some cases turn on factors as specific as whether the buyer gets a permanent right to use the product or just temporary access.
For SaaS companies, streaming platforms, software businesses, and any e-commerce seller dealing in digital products, the practical question isn’t whether the law has changed. It’s whether your compliance setup has kept pace.
This article explains how states categorize digital goods, which states made material changes in 2025 and 2026, and what that means for businesses that set their taxability rules before any of this happened. You’ll get a clear framework for understanding how different states approach digital goods taxation, a breakdown of the most consequential legislative changes including Louisiana’s H.B. 8 and Washington’s S.B. 5814, and a practical audit checklist to identify where your current configuration may be creating silent exposure.
The Problem With Taxing Something You Can’t Touch
Sales tax was built for physical goods. Every state has decades of statutory and case law defining what tangible personal property is and when it’s taxable. Digital products don’t fit that framework cleanly, so states have taken wildly different approaches to bringing them into the tax base.
There is no federal standard for digital goods taxation. Each state defines the category independently, taxes it differently, and updates those rules on its own schedule. The result is a patchwork where the same SaaS subscription can be taxable in Texas, exempt in California, taxable at a reduced rate in Connecticut, and in a genuinely ambiguous gray zone in several others.
The three broad categories states are working with are the ones your taxability configuration needs to get right.
Downloaded digital goods are products delivered as a file the buyer keeps. Think software purchased as a perpetual download, ebooks, music files, and digital games. Most states treat these as the closest analog to tangible personal property and tax them more broadly than other digital categories. More than 30 states tax downloaded software.
Streaming and subscription access covers content accessed remotely but not downloaded. Netflix, Spotify, cloud-hosted software, and SaaS subscriptions fall into this bucket. These are treated as services in most states, which means they fall outside traditional sales tax in states that don’t tax services. But that’s changing. Streaming services are taxable in more than 30 states in 2026, up significantly from five years ago.
SaaS and cloud software includes software accessed over the internet without a local installation. This is the most contested category. As of 2025, approximately 25 states tax SaaS in some form, with significant variation in how they define and apply the tax.
The distinction between these three categories matters because a single product can be taxed differently depending on which part of it a state is looking at. A software platform that lets users download a desktop client and also access a browser-based version may face different taxability treatment for each component.
The States That Moved the Line (And What They Changed)
Digital goods taxability rules changed in at least eight states during 2025 and 2026. These are the most consequential for digital businesses.
Louisiana: January 1, 2025
The biggest single expansion of digital goods taxation in recent years. Louisiana’s H.B. 8, signed in December 2024, brought SaaS, digital products, and information services into the state’s sales tax base effective January 1, 2025.
The law defines “digital products” broadly to include digital audiovisual works, digital audio works, digital books, digital codes, digital applications and games, digital periodicals, and any other otherwise taxable tangible personal property transferred electronically. That applies whether the product is downloaded, streamed, or accessed by subscription. SaaS is explicitly covered as “prewritten computer software access services.”
For businesses selling digital products to Louisiana customers, this created a new obligation retroactive to Q1 2025. If you had Louisiana nexus before January 2025 and weren’t collecting, that exposure needs to be quantified and addressed.
Washington: October 1, 2025
Washington’s S.B. 5814 is one of the most significant expansions of sales tax to digital services in any state in recent years. Unlike Louisiana, which added digital products to an existing sales tax framework, Washington’s change brought entirely new service categories into the retail sales tax for the first time.
Effective October 1, 2025, the following service categories became subject to Washington sales tax for the first time: IT services including technical support, training, consulting, and data entry; custom software development and customization of prewritten software; website design and development; advertising services including digital advertising, search engine marketing, and online referrals (excluding newspapers, broadcast, and billboards); and digital automated services with human effort, a category previously excluded.
The practical impact: technology companies, digital agencies, custom software developers, and IT service providers doing business in Washington needed to begin collecting retail sales tax on October 1, 2025 on services they had never previously had to tax. Many companies in this category had never registered in Washington at all, because their prior service offerings weren’t subject to Washington sales tax.
Washington already taxed digital goods broadly before this change. Downloaded, streamed, and subscription-based digital products were largely taxable under Washington’s pre-existing digital automated services rules regardless of access method or whether the buyer had permanent or temporary use rights. The October 2025 expansion added new service categories on top of that already-broad foundation.
States Actively Expanding Definitions in 2025 and 2026
Several additional states updated guidance or expanded definitions without passing major new legislation. Virginia introduced but has not yet enacted a digital goods tax bill in January 2026. Illinois tightened economic nexus rules affecting digital sellers. Others reviewed or clarified SaaS taxability through administrative guidance.
The Broader Trend
Digital product taxability rules moved in one direction across all state activity in 2025 and 2026: toward broader coverage. No state reduced digital goods taxation during this period. The trajectory is clear. Businesses that assumed digital goods exemptions would persist are working against the current.
How States Think About Digital Goods (And Why It Matters for Your Setup)
Beyond the specific legislative changes, there are a few conceptual tests that drive how most states classify digital goods. Understanding them helps you reason about any state’s rules, not just the ones covered in this article.
The Permanent Right-to-Use Test
Several states tax digital goods only when the buyer receives a permanent right to use the product, not just temporary access. Idaho and Indiana both use this approach.
A one-time software purchase is taxable. A subscription to the same software is not. This distinction creates planning opportunities but also compliance traps. Businesses that sell both perpetual licenses and subscriptions may need different taxability treatment for the same product depending on which pricing model the customer chose.
The Delivery Method Test
Some states tax digital goods based on how they’re delivered, not what they are. Colorado taxes ebooks stored on a flash drive but not the same ebook delivered electronically. The distinction hinges on whether the product is ultimately manifested in a tangible form.
The True Object Test
This test is used in states where the taxability question is ambiguous. If the true object of the transaction is a taxable good like software or media, the whole transaction is taxable, even if bundled with exempt services. If the true object is an exempt service, the whole transaction may be exempt.
Bundled SaaS offerings that include consulting, onboarding, or other service components need particular scrutiny under this test. The way you structure and describe your offering can determine whether the entire transaction is taxable or exempt.
The Tangible Personal Property Analog
Several states have broad definitions that treat digital goods as equivalent to their tangible counterparts. Alabama, Kentucky, and Texas all take this approach. Texas explicitly states that delivering an item electronically does not change its tax status. If the physical version would be taxable, so is the digital version.
Quick-Reference Framework Table
| State approach | How it works | Example states |
| All digital goods taxable | Broad coverage regardless of delivery or access method | Washington, Texas, Alabama |
| Permanent right-to-use only | Taxable only if buyer gets perpetual access; subscriptions may be exempt | Idaho, Indiana |
| Delivery method determines taxability | Downloaded = taxable; streamed = potentially exempt, or vice versa | Colorado, Connecticut (split rates) |
| Specific enumerated categories | Only listed digital good types are taxable; all others exempt | Many SST states |
| Generally exempt with SaaS exception | Traditional digital goods exempt; SaaS explicitly added | Louisiana (post-2025) |
| Generally exempt | Most digital goods remain outside the tax base | California (for SaaS/streaming) |
California deserves a specific note here. It remains the most significant holdout, exempting SaaS and streaming from sales tax at the state level. Discussions about changing this have been ongoing, and the state’s $500K economic nexus threshold means businesses may have nexus there from sales volume alone even if they’re not collecting tax on digital goods.
If Your Taxability Setup Predates 2025, You Probably Have a Problem
Most businesses selling digital products configured their taxability rules when they first set up sales tax compliance. Whether through Avalara, Vertex, TaxJar, or manual configuration in their billing system, that configuration reflected what was true at that point in time.
The problem is that digital goods taxability rules have changed faster than any other category. A setup that was accurate in 2022 or even 2024 may be systematically undertaxing or overtaxing in multiple states today. And because the software calculates something for every transaction without flagging whether the underlying rules have changed, the errors compound silently.
Here are the specific risk areas to evaluate.
Louisiana customers billed before Q1 2025. If you were not collecting on Louisiana sales of SaaS or digital goods before January 2025 and you had nexus there, you have a historical exposure question that needs evaluation. A Voluntary Disclosure Agreement (VDA) can limit look-back and waive penalties, but only if you address it proactively.
Washington IT and digital services since October 2025. If your company provides IT services, custom software development, website development, advertising services, or any of the other categories added by S.B. 5814, and you have Washington nexus, you’ve been required to collect retail sales tax on those services since October 1, 2025. If you haven’t been, that’s an exposure that needs to be addressed.
Subscription vs. download split treatment. If your billing system doesn’t distinguish between perpetual downloads and subscription access, you may be applying uniform taxability where the rules require split treatment. That means over-collecting in some states and under-collecting in others.
Bundled offerings. SaaS products bundled with onboarding, consulting, or professional services often get taxed as all-or-nothing when they should be split. The bundled transaction rules vary by state and most tax software requires explicit configuration to handle them correctly. This is one of the most common sources of taxability mapping errors in Avalara and similar platforms.
Streaming platforms. If you operate a streaming or subscription media service and haven’t audited your state taxability matrix since 2023, the landscape has changed materially. More than 30 states now tax streaming.
What to Check Before You Assume Your Configuration Is Current
A digital goods taxability audit doesn’t require starting over. It requires checking specific things systematically.
Map your product categories against state-specific rules. For every digital product or service type you sell, identify which of the three major categories it falls into: downloaded goods, streamed/subscription access, or SaaS. Then check each state where you have nexus against its current rules for that category. States where you’re registered but haven’t verified the taxability rules for digital goods since 2024 should be reviewed in full.
Check Louisiana specifically if you sell SaaS or digital products. Louisiana’s January 2025 change is the most significant single shift in digital goods taxation in recent years. If you had Louisiana nexus before January 2025 and weren’t collecting, that exposure needs to be quantified and addressed. A VDA can limit look-back and waive penalties. If you began collecting after January 2025, verify that your taxability configuration correctly covers all the digital product types Louisiana’s law enumerates.
Check Washington if you provide IT or digital services. If your service offerings include anything added by S.B. 5814, verify that your Washington taxability configuration was updated for October 1, 2025, and that you’ve been collecting since that date. If you weren’t previously registered in Washington because your prior services weren’t taxable there, that registration gap needs to be addressed.
Review your product bundling logic. Pull a sample of your invoices for customers in states with complex digital goods rules. Are bundled offerings being taxed correctly? Are you splitting service and software components where required? Are you applying the permanent right-to-use distinction in states that require it? If you can’t answer these questions confidently, your configuration likely needs review.
Verify that new products launched since your last configuration review are correctly mapped. Any product launched or repriced after your last taxability review is at risk of being mapped to a generic or incorrect tax code. This is especially true for new tiers, add-on modules, or feature bundles that changed the nature of what you’re delivering.
Check economic nexus in the states that changed their rules. A state that changed its digital goods taxability may also have changed or clarified its economic nexus rules for digital sellers. Verify that your nexus footprint accounts for current thresholds. Use our nexus calculator to check not just the states that changed rules, but any state where you’ve crossed $100K in digital goods sales.
The Rules Changed. The Question Is Whether Your Setup Did.
Digital goods taxation in 2026 looks meaningfully different from 2024. Louisiana added SaaS and digital products to its tax base through H.B. 8. Washington expanded its already-broad digital goods coverage and brought entirely new IT and digital service categories into the retail sales tax for the first time through S.B. 5814. The trend across every state that touched digital goods rules moved in one direction: toward broader coverage. And the businesses most exposed aren’t the ones that ignored compliance. They’re the ones that set it up once and trusted it to stay current.
The silent nature of these errors is what makes them dangerous. Your tax software calculates something for every transaction. It doesn’t flag that the rules in Louisiana changed six months ago, or that your bundled SaaS offering should be split-taxed in Connecticut, or that your IT services are now taxable in Washington. The calculations keep running. The exposure keeps building.
A taxability analysis for digital goods takes the current rules in every state you sell into, applies them to your actual product catalog, and tells you where you’re correctly configured and where you’re not. That analysis is what turns “we think we’re compliant” into knowing you are. It identifies Louisiana exposure before an auditor does. It catches the subscription vs. download split treatment your billing system is handling incorrectly. It surfaces the bundled offering that’s been overtaxed in three states and undertaxed in two others.
For businesses selling SaaS, streaming services, software downloads, IT services, or any digital products across multiple states, the cost of a taxability review is a fraction of the cost of discovering these issues during an audit. And unlike audit defense, a proactive review gives you options. VDAs can limit look-back periods and waive penalties, but only if you address exposure before a state finds it first.
The practical next step is a conversation. Not a sales pitch, but a straightforward assessment of your current setup against the 2025 and 2026 changes. We’ll look at your product mix, your state registrations, and your existing taxability configuration. You’ll leave with clarity on where you stand and what, if anything, needs to change.
Schedule a free What’s Next consultation and find out whether your digital goods compliance is current or whether you’re carrying exposure you don’t know about yet.
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