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

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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When you signed up for Amazon FBA, the pitch was simple: send your inventory to Amazon, and they handle the rest. Storage, picking, packing, shipping, and yes, sales tax collection too. Amazon collects and remits sales tax on your behalf in every state that requires it. The returns, the remittances, all of it. Done.

So why does a growing number of FBA sellers get letters from state tax authorities they’ve never registered in?

Because “Amazon collects sales tax on your sales” and “you have no sales tax obligations” are not the same thing. Amazon’s marketplace facilitator status covers the transaction. It doesn’t cover the fact that your inventory is sitting in a warehouse in Pennsylvania or Texas or New Jersey. A warehouse you never chose, in a state you may have never sold to directly. That inventory is creating physical nexus. And physical nexus creates obligations Amazon doesn’t handle for you.

This article explains exactly how FBA inventory nexus works, what it means for your business, and what to do about it. You’ll learn how to find out which states your inventory has touched, what compliance obligations that creates, and how to address any historical exposure before a state reaches out to you first.

Amazon Handles the Tax Collection. It Doesn’t Handle Your Nexus.

Amazon is a marketplace facilitator. Under laws now in effect in all 45 sales tax states, Amazon is required to collect and remit sales tax on sales made through its platform. That means for every order a customer places on Amazon.com, Amazon calculates the correct rate, collects it at checkout, and sends it to the state. You don’t do any of that. It happens automatically.

This is genuinely useful. It eliminates the collection and filing burden for your Amazon channel sales in most states.

But here’s what marketplace facilitator laws do not do:

They don’t register you in any state. They don’t eliminate your nexus in states where Amazon stores your inventory. They don’t cover sales you make through any channel other than Amazon, including your Shopify store, your own website, wholesale orders, or any other platform. And in many states, they don’t eliminate your obligation to file returns, even returns showing zero tax due.

Amazon handles the transaction. Your nexus footprint is your problem.

Your Inventory Is in States You Never Chose. That’s the Problem.

When you enroll in FBA, you ship your products to Amazon. Amazon then distributes that inventory across its fulfillment network, placing units in warehouses across multiple states to optimize delivery speed to customers. You don’t decide where your inventory goes. Amazon’s algorithms do.

That’s fine for logistics. It’s a problem for sales tax.

Physical nexus is the connection between your business and a state that’s created by physical presence. Inventory sitting in a warehouse is physical presence. In most states, having your products stored in an Amazon fulfillment center, even temporarily, even in small quantities, is enough to establish physical nexus for your business in that state.

A 2025 California ruling confirmed that even minimal FBA inventory constitutes ‘doing business’ in California — triggering the state’s $800 annual LLC franchise tax even for businesses well below California’s economic nexus thresholds.

Amazon operates more than 175 fulfillment centers across the United States. Sellers using FBA typically find their inventory distributed across anywhere from 8 to 20+ states at any given time. Those states shift as Amazon rebalances its network, often without notifying individual sellers.

The key implication: Every state where Amazon has ever stored your inventory is a state where you likely have, or have had, physical nexus. That means registration obligations, return filing obligations, and in some states, income and franchise tax obligations. None of which Amazon handles on your behalf.

Step One: Figure Out Where Your Inventory Actually Is

Amazon provides the data you need. You just have to know where to look.

Log In to Amazon Seller Central

Start by signing into your Seller Central account. All the inventory location data lives in your reports dashboard.

Navigate to Reports and Fulfillment

From the main menu, go to Reports, then select Fulfillment. This is where Amazon stores all your FBA-related data.

Download the FBA Inventory Ledger Report

Download the FBA Inventory Ledger report using the Detail View. This was formerly called the Inventory Event Detail report. Select a date range that goes back to when you first started selling on FBA, not just the current period.

Locate the Fulfillment Center ID Column

Open the file and find the “fulfillment-center-id” column. Each code corresponds to a specific Amazon warehouse location.

Filter or Pivot by State

Map each fulfillment center ID to its state location. Filter or create a pivot table to see every state where Amazon has stored your inventory, and for how long.

The fulfillment center ID codes map to specific warehouse locations. Amazon fulfillment centers in states with major footprints include California, Texas, Pennsylvania, New Jersey, Illinois, Michigan, Georgia, Ohio, and Washington, among others. If your inventory has touched any of those warehouses, you likely have physical nexus there.

Important: Pull this report back to when you first started selling on FBA, not just the current period. Nexus obligations don’t start from when you discovered them. They start from when the inventory arrived.

A note on the moving target: Amazon rebalances inventory regularly. A state that shows zero inventory today may have stored your products last quarter. And new states can appear without warning as Amazon opens new facilities or redistributes stock. This is an ongoing monitoring task, not a one-time check.

Having Nexus Means Having Obligations. Here’s What They Are.

Once you establish that Amazon has stored your inventory in a state, the obligations in that state typically include:

Registration: You need a sales tax permit in that state. Amazon collecting tax on your Amazon sales doesn’t substitute for registration. Many states require sellers with nexus to be registered regardless of whether a marketplace facilitator is collecting on their behalf.

Return filing: Most states where you’re registered require you to file returns, even if Amazon remitted all the tax and your own return shows zero dollars due. These “zero-dollar returns” are not optional. Missing them generates penalties the same way missing a return with tax due does.

Non-Amazon channel compliance: If you sell through your own website, Shopify store, or any other channel into a state where you have nexus, you are responsible for collecting and remitting sales tax on those sales yourself. Amazon’s marketplace facilitator status covers only Amazon. Your Shopify store is entirely your responsibility.

Income and franchise tax: This is the obligation most FBA sellers don’t know about at all. Marketplace facilitator laws cover sales tax only. Physical nexus created by inventory in a state can also create income tax and franchise tax obligations in that state. California’s $800 minimum franchise tax applies to any business with nexus there, regardless of profitability.

Property tax: Some states tax business personal property, including inventory. If your products are sitting in a warehouse in a state with inventory property tax rules, that inventory may be taxable.

The Harder Question: What About the States You’ve Already Been In?

Most FBA sellers who discover the inventory nexus problem aren’t discovering it as a new business. They’re discovering it two or three years into selling, after their inventory has already touched 10 or 15 states they never registered in.

That creates a historical exposure question: what do you owe for the periods before you knew?

A few things to understand:

Sales tax is a gross revenue tax. It’s calculated on what you sell, not what you profit. Exposure compounds across every transaction in every unregistered state for however long inventory was sitting there.

Non-filers face unlimited look-back in most states. If you were never registered and never filed, the state’s statute of limitations clock never started. In states like California, the non-filer look-back is capped at 8 years. In others, it’s genuinely open-ended.

There is also the question of what you owe vs. what Amazon already collected. Amazon collected and remitted sales tax on your Amazon transactions, but you weren’t registered in those states, so you didn’t file returns showing that collection. Some states will still expect filings, even retroactively, showing the transactions and the amounts Amazon handled.

The good news: Voluntary Disclosure Agreements (VDAs) exist specifically for this situation. A VDA lets you come forward proactively, pay back taxes and interest, get penalties waived entirely, and limit the look-back period to 3-4 years rather than indefinitely. They can often be filed anonymously before your identity is disclosed to the state. For an FBA seller with exposure across multiple states, working through VDAs in parallel is almost always the right path.

Learn more about how VDAs and registrations work.

If You Also Sell Outside Amazon, It Gets More Complex

If Amazon is your only channel, the compliance picture, while still requiring registration and return filing, is at least contained. Amazon is collecting the tax on your transactions. Your job is getting registered, filing the required returns (including zero-dollar ones), and managing non-sales-tax obligations like income tax.

If you also sell through your own website or another non-marketplace channel, the picture changes. Now you’re operating two compliance regimes simultaneously:

Amazon orders: Tax collected and remitted by Amazon, but registration and filing still your responsibility in nexus states.

Non-Amazon orders: Entirely your responsibility. Nexus monitoring, collection configuration, registration, and remittance. The physical nexus you established through FBA applies to your entire business, not just your Amazon channel. If you have nexus in Pennsylvania because Amazon stored inventory there, you’re responsible for collecting and remitting sales tax on your Shopify sales to Pennsylvania customers too.

This is the most common compliance gap among growing FBA sellers: Amazon is handling the Amazon side cleanly, while the Shopify store is quietly accumulating uncollected liability in the same states.

For a broader look at how sales tax compliance works across multiple selling channels, see our guide to e-commerce sales tax compliance.

The Right Order of Operations

Pull Your FBA Inventory Ledger Report

Go back to when you first started selling. Map every fulfillment center to its state. That’s your nexus footprint.

Check Economic Nexus Too

Even in states where Amazon hasn’t stored your inventory, you may have crossed economic nexus thresholds through sales volume. Run your sales history through our nexus calculator to identify any additional exposure.

Quantify Historical Exposure

For states where you’ve had inventory but never registered, get an estimate of the liability, including penalties and interest, before deciding on next steps. You need to know the number before you can address it.

Evaluate VDA Eligibility

If historical exposure is material, VDAs are almost always the right path. They limit look-back, waive penalties, and give you a clean starting point. Critically, the window to file a VDA closes once a state contacts you directly. If you’ve already received a letter from a state, that changes the situation. Get advice before you respond.

Register in Your Current Nexus States

Going forward, you need to be registered in every state where Amazon is currently storing your inventory. Set a reminder to re-check your inventory report quarterly. Your nexus footprint changes as Amazon rebalances its network.

Audit Your Non-Amazon Channels

If you have a Shopify store or sell through any other channel, make sure you’re collecting correctly in every state where you have nexus. The FBA nexus that Amazon created applies to your whole business.

Amazon Did a Lot of the Work. You Still Have to Know What It Didn’t Do.

Amazon’s marketplace facilitator system genuinely simplified something that used to be very complicated. Most of your sales tax collection and remittance for Amazon orders is handled automatically. That’s real, and it matters.

But the inventory nexus problem doesn’t care about what Amazon collects. It cares about where your products are. And if you’ve been selling on FBA for more than a year without looking at your inventory ledger, you probably have nexus in states you’ve never thought about.

Here’s what we know from working with FBA sellers every day: the businesses that address this proactively almost always come out ahead. VDAs limit look-back periods. Penalties get waived. Registration gets you compliant going forward. The math works in your favor when you move first.

The businesses that wait for a state letter? They lose the VDA option. They face full look-back periods. And they pay penalties that could have been avoided entirely.

You now have the information you need to pull your inventory report, map your nexus footprint, and understand what obligations that creates. The question is what you do with it.

If you’re looking at a list of states and wondering where to start, or if you’ve already received correspondence from a state and aren’t sure how to respond, a conversation with someone who does this every day can save you significant time and money. Our What’s Next consultation is free, and it’s designed for exactly this situation. No pressure, no commitment. Just clarity on your specific nexus footprint and the best path forward for your business.

The window to solve this on your own terms is open right now. Schedule your free What’s Next call and find out exactly where you stand.

The post Amazon FBA and Sales Tax Nexus: What Happens When Amazon Moves Your Inventory appeared first on The Sales Tax People.

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For decades, software sold over the internet lived in a gray area of sales tax law. States wrote their tax codes when “tangible personal property” meant something you could hold in your hands. Software didn’t fit neatly into that world, so most states either exempted it, taxed it inconsistently, or just looked the other way.

California just changed the rules.

Senate Bill 122, passed by the California Legislature on June 18, 2026, and now awaiting Governor Newsom’s signature, would redefine “tangible personal property” to include digital products, specifically prewritten computer software. That includes software you download. Software you access through a browser. SaaS platforms your team logs into every day. If signed, those purchases would be subject to California sales and use tax starting January 1, 2027.

The bill has broad support across the legislature and is described as part of a three-party consensus agreement among the Assembly, Senate, and Governor. Signature is widely expected. But until it happens, this remains a proposal, not a mandate.

That said: the January 2027 effective date leaves almost no runway. If you wait for the governor’s signature before you start preparing, you will already be behind. Here’s what the bill does and what you should be doing now.

What Changed, Exactly

California’s Sales and Use Tax Law has always taxed “tangible personal property,” meaning things you can see, touch, weigh, or measure. SB 122 would add a second category to that definition: digital products and any copyright or patent interests associated with them.

A “digital product” under the new law means prewritten computer software. That covers three delivery methods:

• Transferred on tangible storage media: software on a disc or USB drive (already taxable in most cases, now codified)
• Transferred electronically: software you download directly
• Accessed remotely: software that runs on the vendor’s server and you access via password or digital code (what most people call SaaS or cloud software)

The law is specific that this applies to prewritten software, meaning software that exists for general or repeated sale. Custom software built specifically for your company is still excluded.

What’s Not Included

The bill carves out several categories from the “digital product” definition. These would be exempt from the new tax:

• Digital audio works: music, podcasts, ringtones
• Digital audiovisual works: streaming video, films
• Digital books: ebooks and the like
• Digital video games: consumer gaming products
• Digital visual works: digital artwork
• Digital assets: cryptocurrency and similar blockchain-based instruments
• Digital infrastructure: cloud services where you run your own software on someone else’s platform

That last carve-out deserves attention. “Digital infrastructure” means cloud-based services where the customer creates, deploys, scales, or runs their own software on the provider’s platform, without managing the underlying hardware or network. Think AWS, Google Cloud, Microsoft Azure. Those are explicitly excluded.

The line being drawn here is between using someone else’s software (taxable) and running your own software on someone else’s infrastructure (not taxable). If your business relies heavily on IaaS or PaaS providers, those costs are outside the scope of this law. If your team logs into a vendor’s SaaS platform to do work, those subscriptions are now in scope.

The $5 Million Threshold: A Major Compliance Wrinkle for Enterprise Buyers

Here’s where it gets operationally complicated for mid-market and larger companies.

The bill includes a threshold provision: if a purchaser buys more than $5 million in taxable digital products from a single retailer in a calendar year, the retailer would be relieved of the obligation to collect and remit the tax. The purchaser would become responsible for self-assessing and paying use tax directly to the California Department of Tax and Fee Administration (CDTFA).

That $5 million figure is per retailer, per year. It is not a combined total across all your software vendors. It is vendor-by-vendor. And starting January 1, 2028, it applies if you exceeded the threshold in either the current or the preceding calendar year.

If this threshold applies to you, you will need to obtain a use tax direct payment permit from the CDTFA. That permit requires you to register the California business locations where you expect to first use the software, and to file and pay use tax returns directly. This is not a passive process. It creates active compliance obligations that many finance teams are not currently set up to handle.

For most mid-market companies, the $5 million threshold won’t apply to any single software vendor. But if you have large enterprise agreements covering a major ERP platform, a sprawling CRM, or a mission-critical cloud suite, it’s worth doing the math now, before 2027 arrives.

Sourcing Rules: Where Does the Sale Happen?

SB 122 would establish clear rules for determining where a digital product sale is sourced, which matters for figuring out what local sales tax rate applies.

For software that isn’t sold in person at a physical location, the sourcing hierarchy works like this:

1. Purchaser’s billing address
2. Purchaser’s shipping or delivery address
3. Mailing address associated with the purchaser’s payment instrument
4. Purchaser’s mailing address

The bill also includes a presumption worth knowing: if you purchase a digital product from outside California and use it in California within 90 days of purchase, it’s presumed the purchase was made for use in California. Use tax applies, regardless of where the transaction technically occurred.

This is the state closing a gap. Companies that historically purchased software from out-of-state vendors and didn’t pay California sales tax will now have a clear, codified obligation to self-report and pay use tax on those purchases.

What This Means If You Sell Software

If SB 122 is signed and your company sells prewritten software to California customers, whether via download or SaaS subscription, you would have new collection obligations starting January 1, 2027.

If your California customer buys less than $5 million from you annually, you collect and remit just like you would for any other taxable product. The sourcing rules are clear, and the CDTFA is receiving $750,000 in funding specifically to build out the administrative infrastructure for this.

The more complex situation involves multi-state licensing. If you sell a software license that covers users in multiple states simultaneously, California’s law allows for an apportionment methodology. The CDTFA is authorized to set rules for how to calculate the tax due on licenses with concurrent multi-location use. Those rules don’t exist yet. They need to be developed before 2027. If you have licenses spanning multiple jurisdictions, watch for CDTFA guidance closely.

There’s also a good-faith protection built in. If a retailer uses a customer’s address information in good faith and that information turns out to be inaccurate, the retailer isn’t liable for the resulting error. But good faith means you actually tried. Documenting your sourcing methodology will matter if you’re ever audited.

The Anti-Rebate Provision

One additional piece worth flagging: SB 122 would prohibit any purchaser or retailer of digital products from entering into an agreement that would redirect, rebate, or divert Bradley-Burns local sales tax revenue from a digital product sale. Local agencies would face the same prohibition.

This closes a loophole some jurisdictions had used to attract retail operations, essentially agreeing to kick back local sales tax revenue to retailers as an economic incentive. That practice is now off the table for digital product transactions, full stop.

What You Should Be Doing Right Now

January 2027 feels distant. It isn’t. Here’s how to use the time you have.

Audit your software spend. Pull a complete list of your SaaS and software subscriptions. Categorize them: Is this prewritten software? Is it delivered electronically or accessed remotely? What’s the annual spend with each vendor? How many of your users or business locations are in California? This inventory is the foundation of everything else.

Check against the exclusions. Work through the carve-outs. Infrastructure-as-a-service, gaming products, digital media, digital books: if any of your software spend falls into those categories, document the basis for the exclusion. The burden of proof lives with the purchaser.

Identify your $5 million vendors. If you have any single software vendor where your California purchases could approach $5 million annually, flag that relationship now. Getting a use tax direct payment permit set up and filing a return directly with the CDTFA is a very different process than receiving a tax line on a vendor invoice. Your team needs time to build that workflow.

Talk to your vendors. Your software vendors are working through this too. They will need to update their billing systems, invoicing, and exemption certificate processes. Start the conversation early. Ask how they’re planning to handle California tax collection starting in 2027. If they don’t have an answer yet, that’s a signal to follow up.

Review your exemption certificate situation. If you currently hold resale certificates or other exemption documentation with software vendors, make sure those are current. You’ll want your records clean before the new rules take effect.

Get ahead of use tax exposure. If your company has been buying out-of-state software and not self-assessing California use tax, the new law makes that obligation explicit and enforceable. A voluntary disclosure approach, handled before an audit notice arrives, is almost always a better outcome than one that isn’t.

The Bottom Line

California’s SB 122 is not yet law. But it passed with broad legislative support as part of a consensus budget agreement, the governor is expected to sign it, and the January 1, 2027 effective date is fixed in the bill text. The gap between “expected to be signed” and “signed” is not a reason to wait.

The companies that will struggle are the ones treating this as something to revisit after the governor acts. The companies that won’t are the ones mapping their exposure now, having the right conversations with vendors and advisors, and building the internal processes to handle a new category of taxable spend before the deadline hits.

We are monitoring SB 122 closely and will update this article when the governor signs. If you want to understand your California digital products exposure before that happens, we’re happy to take a look.

That last carve-out deserves attention. “Digital infrastructure” means cloud-based services where the customer creates, deploys, scales, or runs their own software on the provider’s platform, without managing the underlying hardware or network. Think AWS, Google Cloud, Microsoft Azure. Those are explicitly excluded.

The line being drawn here is between using someone else’s software (taxable) and running your own software on someone else’s infrastructure (not taxable). If your business relies heavily on IaaS or PaaS providers, those costs are outside the scope of this law. If your team logs into a vendor’s SaaS platform to do work, those subscriptions are now in scope.

The $5 Million Threshold: A Major Compliance Wrinkle for Enterprise Buyers

Here’s where it gets operationally complicated for mid-market and larger companies.

The law includes a threshold provision: if a purchaser buys more than $5 million in taxable digital products from a single retailer in a calendar year, the retailer is relieved of the obligation to collect and remit the tax. The purchaser becomes responsible for self-assessing and paying use tax directly to the California Department of Tax and Fee Administration (CDTFA).

That $5 million figure is per retailer, per year. It is not a combined total across all your software vendors. It is vendor-by-vendor. And starting January 1, 2028, it applies if you exceeded the threshold in either the current or the preceding calendar year.

If this threshold applies to you, you will need to obtain a use tax direct payment permit from the CDTFA. That permit requires you to register the California business locations where you expect to first use the software, and to file and pay use tax returns directly. This is not a passive process. It creates active compliance obligations that many finance teams are not currently set up to handle.

For most mid-market companies, the $5 million threshold won’t apply to any single software vendor. But if you have large enterprise agreements covering a major ERP platform, a sprawling CRM, or a mission-critical cloud suite, it’s worth doing the math now, before 2027 arrives.

Sourcing Rules: Where Does the Sale Happen?

California’s new law establishes clear rules for determining where a digital product sale is sourced, which matters for figuring out what local sales tax rate applies.

For software that isn’t sold in person at a physical location, the sourcing hierarchy works like this:

1. Purchaser’s billing address
2. Purchaser’s shipping or delivery address
3. Mailing address associated with the purchaser’s payment instrument
4. Purchaser’s mailing address

The bill also includes a presumption worth knowing: if you purchase a digital product from outside California and use it in California within 90 days of purchase, it’s presumed the purchase was made for use in California. Use tax applies, regardless of where the transaction technically occurred.

This is the state closing a gap. Companies that historically purchased software from out-of-state vendors and didn’t pay California sales tax will now have a clear, codified obligation to self-report and pay use tax on those purchases.

What This Means If You Sell Software

If your company sells prewritten software to California customers, whether via download or SaaS subscription, you have new collection obligations starting January 1, 2027.

If your California customer buys less than $5 million from you annually, you collect and remit just like you would for any other taxable product. The sourcing rules are clear, and the CDTFA is receiving $750,000 in funding specifically to build out the administrative infrastructure for this.

The more complex situation involves multi-state licensing. If you sell a software license that covers users in multiple states simultaneously, California’s law allows for an apportionment methodology. The CDTFA is authorized to set rules for how to calculate the tax due on licenses with concurrent multi-location use. Those rules don’t exist yet. They need to be developed before 2027. If you have licenses spanning multiple jurisdictions, watch for CDTFA guidance closely.

There’s also a good-faith protection built in. If a retailer uses a customer’s address information in good faith and that information turns out to be inaccurate, the retailer isn’t liable for the resulting error. But good faith means you actually tried. Documenting your sourcing methodology will matter if you’re ever audited.

The Anti-Rebate Provision

One additional piece worth flagging: the law prohibits any purchaser or retailer of digital products from entering into an agreement that would redirect, rebate, or divert Bradley-Burns local sales tax revenue from a digital product sale. Local agencies face the same prohibition.

This closes a loophole some jurisdictions had used to attract retail operations, essentially agreeing to kick back local sales tax revenue to retailers as an economic incentive. That practice is now off the table for digital product transactions, full stop.

What You Should Be Doing Right Now

January 2027 feels distant. It isn’t. Here’s how to use the time you have.

Audit your software spend. Pull a complete list of your SaaS and software subscriptions. Categorize them: Is this prewritten software? Is it delivered electronically or accessed remotely? What’s the annual spend with each vendor? How many of your users or business locations are in California? This inventory is the foundation of everything else.

Check against the exclusions. Work through the carve-outs. Infrastructure-as-a-service, gaming products, digital media, digital books: if any of your software spend falls into those categories, document the basis for the exclusion. The burden of proof lives with the purchaser.

Identify your $5 million vendors. If you have any single software vendor where your California purchases could approach $5 million annually, flag that relationship now. Getting a use tax direct payment permit set up and filing a return directly with the CDTFA is a very different process than receiving a tax line on a vendor invoice. Your team needs time to build that workflow.

Talk to your vendors. Your software vendors are working through this too. They will need to update their billing systems, invoicing, and exemption certificate processes. Start the conversation early. Ask how they’re planning to handle California tax collection starting in 2027. If they don’t have an answer yet, that’s a signal to follow up.

Review your exemption certificate situation. If you currently hold resale certificates or other exemption documentation with software vendors, make sure those are current. You’ll want your records clean before the new rules take effect.

Get ahead of use tax exposure. If your company has been buying out-of-state software and not self-assessing California use tax, the new law makes that obligation explicit and enforceable. A voluntary disclosure approach, handled before an audit notice arrives, is almost always a better outcome than one that isn’t.

The Bottom Line

California has been one of the last major states to bring software purchases clearly into its sales tax framework. The 2027 effective date gives businesses time to prepare, but that time is finite, and the compliance infrastructure you need to build doesn’t happen overnight.

The companies that will struggle are the ones that treat this as a 2026 problem. The companies that won’t are the ones mapping their exposure now, having the right conversations with vendors and advisors, and building the internal processes to handle a new category of taxable spend before the deadline hits.

If you’re not sure where your company stands on California digital products exposure, that uncertainty is itself the answer. This is a good time to get clarity.

The post California Is Coming for Your Software: What the 2027 Digital Products Tax Means for Your Business appeared first on The Sales Tax People.

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Sales tax rates vary widely across the United States. While most states impose a statewide sales tax, many also allow counties, cities, and special districts to add their own local rates. The result? A patchwork of combined state and local sales tax rates that can differ dramatically not just by state, but by ZIP code.

For businesses operating in multiple jurisdictions, understanding which states with the highest sales tax rates apply to them is crucial to manage compliance risk, pricing strategy, and filing complexity. This guide breaks down the states with the highest sales tax and what businesses should know if they operate there.

What Determines Sales Tax Rates by State?

Sales tax is imposed at two primary levels:

1. State vs. Local Sales Tax

Most states set a base statewide rate. Local governments, including counties, cities, and special districts, may add their own rates on top of the state rate. These additions are authorized under state law.

For example, a state may impose a 6% sales tax, while local jurisdictions add 2–4%, resulting in a much higher combined rate.

2. County & City Add-Ons

Local add-ons can significantly increase the total rate. In some metropolitan areas, combined rates exceed 9% or even 10%.

3. Budget Structure and Revenue Mix

States rely on different combinations of income, property, and sales taxes to fund public services. States that rely more heavily on consumption taxes may set higher sales tax rates.

4. The No-Income-Tax Tradeoff

Some states with no individual income tax rely more heavily on sales tax revenue. Tennessee and Nevada are examples of states without a broad-based individual income tax that also have high combined sales tax rates. (For more context, see our guide to states with no sales tax.)

States With the Highest Sales Tax Rates (Ranked)

Rates below reflect statewide rates and approximate average combined state + local rates. Combined averages vary by locality and are subject to change.

1. Louisiana

State rate: 4.45%
Average combined rate: ~9.55%

Why it’s high: Louisiana allows extensive local sales tax additions, which significantly increase the combined rate in many jurisdictions.

Business takeaway: Local administration of sales tax in Louisiana can be complex, as parishes often administer and audit their own local taxes separately from the state.

2. Tennessee

State rate: 7.00%
Average combined rate: ~9.55%

Why it’s high: Tennessee has one of the highest statewide rates in the country and also permits local option taxes.

Business takeaway: Businesses should carefully track local rates, especially if selling into multiple Tennessee counties.

3. Arkansas

State rate: 6.50%
Average combined rate: ~9.45%

Why it’s high: Arkansas permits substantial local additions, pushing combined rates higher in many cities.

Business takeaway: Sellers must apply the correct destination-based combined rate for each transaction.

4. Washington

State rate: 6.50%
Average combined rate: ~9.38%

Why it’s high: Washington relies heavily on sales tax revenue and has no personal income tax. Local jurisdictions also impose additional rates.

Business takeaway: Washington’s business and occupation (B&O) tax is separate from sales tax and may apply even when no sales tax is due.

5. Alabama

State rate: 4.00%
Average combined rate: ~9.29%

Why it’s high: While the state rate is moderate, local jurisdictions can add significant additional tax.

Business takeaway: Alabama is a “home rule” state, meaning many localities administer their own sales tax, increasing compliance complexity.

6. Oklahoma

State rate: 4.50%
Average combined rate: ~8.98%

Why it’s high: Cities and counties frequently add local sales tax rates.

Business takeaway: Businesses must monitor both state and municipal rate changes.

7. Illinois

State rate: 6.25%
Average combined rate: ~8.86%

Why it’s high: Illinois permits layered local taxes in certain jurisdictions, particularly in major metro areas like Chicago.

Business takeaway: Chicago and surrounding areas can have materially higher rates than the statewide base.

8. California

State rate: 7.25%
Average combined rate: ~8.85%

Why it’s high: California has one of the highest statewide base rates. Local district taxes can increase the combined rate further.

Business takeaway: California’s district taxes apply based on destination sourcing for most transactions.

States With High Local Sales Taxes (Even if the State Rate Is Lower)

Some states may not rank highest at the statewide level but have metro areas with elevated combined rates due to aggressive local add-ons.

Examples include:

• Colorado (2.90% state rate, but significant local home-rule authority)
• Arizona (5.60% state rate with transaction privilege tax structure)
• Missouri (4.225% state rate with layered local taxes)

In these states, business location alone does not determine exposure. Depending on your sales tax nexus footprint, you may need to collect the applicable combined rate.

How High Sales Tax States Impact Businesses

High combined rates affect more than checkout totals.

1. Higher Compliance Risk

More jurisdictions mean more potential registration requirements, filings, and audit exposure.

2. Customer Pricing Sensitivity

In higher-tax states, the total cost to the customer increases. Businesses should factor sales tax visibility into pricing strategy.

3. Filing Complexity

States with heavy local administration (e.g., Louisiana, Alabama, Colorado) often require separate filings or additional reporting layers.

4. Audit Exposure

Higher revenue reliance on sales tax can translate into increased enforcement activity. Businesses operating in high-rate states should ensure documentation and exemption certificate management are accurate and current.

A quick reminder, sales tax compliance is not just about the rate. Peace of mind comes from applying the correct combined rate, filing accurately, and responding confidently to notices.

What Businesses Can Do If They Operate in High-Tax States

If you operate in states with high sales tax, a proactive approach matters.

• Understand your nexus exposure. Economic nexus thresholds vary by state. Start with nexus before making registration decisions.
• Register correctly. Ensure you are registered in the correct jurisdictions.
• Apply accurate combined rates. Sales tax is typically destination-based for remote sellers.
• Automate calculations. Rate databases change frequently. Automated tools can reduce error risk.
• Monitor rate changes. Local jurisdictions regularly adjust rates, especially in high-tax states. (You can sign up for our newsletter for updates or head to our mini blog hub where legislation changes are announced).

The name of the game is structured compliance. 

Final Thoughts: Navigating Sales Tax in High-Rate States

Operating in high sales tax states doesn’t have to mean higher risk. When you start with nexus, businesses can navigate combined state and local sales tax requirements confidently.

High rates increase complexity. Complexity increases exposure. But with clear processes, accurate rate application, and ongoing monitoring, your business can stay compliant and focused on growth.

If you’re unsure where you stand, start by calculating your nexus footprint and reviewing your combined rate accuracy. Simplify your sales taxes and protect your business (before an auditor asks questions).

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Updated – Originally published February 5th, 2025

Managing sales tax can feel overwhelming—especially as your business grows and expands into multiple states. Each state has its own sales tax rates, filing deadlines, and compliance rules. One of the most commonly misunderstood rules is trailing nexus.

Trailing nexus can require your business to continue collecting and remitting sales tax after you’ve left a state or fallen below its nexus threshold. In this guide, we’ll explain what trailing nexus is, how it works, which states enforce it in 2025, and how to stay compliant—without the stress.

Trailing Nexus: Simple Definition

Trailing nexus (sometimes called residual nexus) means a business may still be required to collect and remit sales tax for a period of time after it no longer meets a state’s physical or economic nexus thresholds.

Sales Tax Nexus Basics

Sales tax nexus determines whether your business has a legal obligation to collect and remit sales tax in a state. Nexus is created when your business reaches a minimum level of activity in a state, and it’s your responsibility to understand when you’ve crossed that line.

There are two primary types of sales tax nexus:

Physical Nexus

Physical nexus is created when your business has a tangible presence in a state. This can include:

• A store, office, or warehouse
• Inventory stored in the state
• Employees or remote workers living in the state

Many businesses are surprised to learn that a single remote employee can establish physical nexus—even if the business owns no property there.

Economic Nexus

Economic nexus is created when a business reaches a certain level of sales or transactions in a state, even without a physical presence. These thresholds vary by state and are typically based on:

• Total revenue in the state
• Number of transactions in the state

Because nexus rules differ in every state, tracking your activity across state lines is essential. For many businesses, nexus impacts strategic decisions about hiring, expansion, and where to sell products or services.

How Trailing Nexus Works

Trailing nexus comes into play after a business no longer meets a state’s nexus threshold—but isn’t immediately released from its sales tax obligations.

Why States Use Trailing Nexus

States recognize that economic activity doesn’t stop instantly. Even if a business closes a physical location or dips below an economic threshold, prior activity can continue to generate revenue. Trailing nexus allows states to collect sales tax on this continued economic impact.

How Long Trailing Nexus Lasts

The duration of trailing nexus varies by state. Some states require collection through the end of the calendar year, while others require businesses to remain registered until they formally withdraw their sales tax license.

Trailing Nexus vs. Regular Nexus

• Regular nexus: Your obligation begins when you exceed a threshold.
• Trailing nexus: Your obligation may continue after you fall below that threshold or leave the state.

Trailing Nexus Laws by State (2025 Update)

Sales tax laws change frequently, so it’s important to stay current. As of 2025, the following states have clear trailing nexus rules.

States With Trailing Nexus

• California trailing nexus: Remote businesses with economic nexus must continue collecting sales tax for the entire calendar year following the year they fall below the nexus threshold.
• Colorado trailing nexus: Remote sellers are required to collect sales tax for the entire calendar year following the year they no longer meet economic nexus.
• Michigan trailing nexus: Businesses with physical nexus must collect sales tax for 11 months after nexus ends. Remote sellers with economic nexus must collect for the entire following calendar year.
• Missouri trailing nexus: Businesses maintain nexus until they formally withdraw their sales tax registration.
• Washington trailing nexus / Washington State trailing nexus: Businesses must collect sales tax for the entire calendar year following the year nexus is no longer met.
• Wisconsin trailing nexus: Even after falling below nexus thresholds, businesses must collect and remit sales tax through the end of the year.

States WITHOUT Trailing Nexus

The following states have expressly stated that trailing nexus does not apply:

• Connecticut
• District of Columbia
• Florida 
• Idaho
• New York 

States With Unclear or Unspecified Trailing Nexus Rules

Many states have not explicitly addressed trailing nexus in their statutes or guidance. In these states, it’s generally accepted that trailing nexus does not apply—but this can change. This uncertainty is why searches like trailing nexus states and what states have trailing nexus remain so common.

Examples of Trailing Nexus in Action

Economic Nexus Trailing Example

A remote seller exceeds $100,000 in sales in a state during 2024, creating economic nexus. In 2025, sales fall below the threshold—but the state requires collection for the entire 2025 calendar year under trailing nexus rules.

Physical Nexus Trailing Example

A business closes its warehouse in a state in June. Even though physical nexus ends, the state requires continued collection for several additional months due to trailing nexus.

Trailing Nexus for Income Tax

Trailing nexus is most commonly discussed in the context of sales tax, but similar concepts can apply to income tax trailing nexus. Some states may continue to assert income tax filing obligations even after a business exits the state. Income tax trailing nexus rules vary widely and should be reviewed separately from sales tax requirements.

How Long Does Trailing Nexus Last?

Why Trailing Nexus Matters for Remote Sellers

Trailing nexus is especially important for:

• E-commerce businesses
• Remote sellers
• Businesses with remote employees
• Sellers of digital goods and services

As digital commerce continues to grow, states are paying closer attention to remote activity—and trailing nexus allows them to extend tax obligations beyond the moment nexus technically ends.

How to Stay Compliant With Trailing Nexus

Track Activity in Every State

Monitor revenue, transaction counts, and physical presence in each state where you operate.

Maintain Required Records

Strong recordkeeping is essential:

• Sales receipts: keep for at least seven years
• Invoices: keep for at least seven years
• Exemption certificates: keep permanently
• Sales tax returns: keep permanently

Deregistration Isn’t Instant — Know Your State Rules

Canceling your sales tax license doesn’t automatically end your obligation. Trailing nexus rules may still apply—even after deregistration.

Do You Need a Sales Tax Expert?

Trailing nexus adds yet another layer of complexity to sales tax compliance. When you’re operating in multiple states, staying compliant requires clarity, organization, and ongoing attention.

At The Sales Tax People (formerly Peisner Johnson), real accountants and consultants help you understand your nexus footprint, manage trailing nexus exposure, and simplify your sales tax process—so you can focus on growing your business with confidence.

Simplify your sales taxes. Protect your business. Discover peace of mind.Schedule a free What’s Next? consultation to get clear answers and a plan you can trust.

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Updated – Originally published May 15, 2025

Sales tax laws change constantly, especially as shopping habits shift toward online and multi-channel selling. One of the biggest changes in recent years is the rise of marketplace facilitator laws for online sellers — rules that determine who is responsible for collecting and remitting sales tax when sales happen through a marketplace.

If you sell on platforms like Amazon, Etsy, eBay, or Walmart, these laws directly affect your sales tax obligations. Let’s break down what marketplace facilitator laws are, how they impact sales tax, and what marketplace sellers need to do to stay compliant.

What Are Marketplace Facilitator Laws?

Marketplace facilitator laws define when a platform — not the individual seller — is responsible for sales tax.

A marketplace facilitator is any company that creates a channel for other businesses or individuals to sell their products. Think of it like the organizer of a farmers’ market or swap meet: they bring sellers together, provide the space (physical or digital), and connect them with buyers. Today, that often looks like an online marketplace curating sellers and processing transactions on their behalf.

Under marketplace facilitator laws for online sellers, many states require the marketplace itself to calculate, collect, and remit sales tax for transactions that occur on the platform — as long as the marketplace meets certain thresholds. These laws shift sales tax responsibility away from individual sellers and onto the facilitator.

That doesn’t mean sellers are off the hook entirely — but it does change who does what.

How Marketplace Facilitator Laws Impact Sales Tax

The biggest change is who is responsible for sales tax.

Traditionally, sellers collected and remitted sales tax anywhere they had nexus. Under modern marketplace laws, the marketplace facilitator is usually responsible for sales tax for marketplace sellers when a transaction occurs on their platform.

This shift accelerated after the 2018 Supreme Court decision South Dakota v. Wayfair, which established that businesses — including marketplaces — can create economic nexus without a physical presence. In response, states moved quickly to pass marketplace facilitator legislation, and many of those laws are still evolving.

In most states today:

• The marketplace collects and remits sales tax on marketplace transactions
• Sellers remain responsible for sales tax on non-marketplace sales
  
• Sellers must keep accurate records of marketplace transactions, even when the platform handles tax

If you’re unsure whether you still need to register or file, our article on sales tax compliance and Do I Need to Register for a Sales Tax License? can help clarify your next step.

Does Amazon Collect and Pay Sales Tax for Sellers?

A common question we hear is: does Amazon collect sales tax for sellers?

In most states with marketplace facilitator laws, the answer is yes. Amazon sales tax for sellers is generally collected and remitted by Amazon on third-party sales shipped to those states.

This applies whether you use Seller Fulfilled Prime or Fulfillment by Amazon (FBA) — though FBA inventory can create nexus in additional states depending on where inventory is stored. Once Amazon meets a state’s economic nexus threshold (which it typically does), Amazon becomes responsible for collecting and remitting state-level sales tax on marketplace transactions.

That said, sellers are still responsible for:

• Sales tax on non-Amazon sales
• Understanding whether local taxes or special reporting requirements apply
• Maintaining documentation for audits

Does Etsy Collect and Remit Sales Tax for Sellers?

If you’ve ever asked, “does Etsy pay sales tax for me?”, the answer is generally yes — but with nuance.

Etsy sales tax for sellers is automatically calculated, collected, and remitted by Etsy for physical and digital items sold to buyers in the U.S., regardless of where the seller is located. The tax rate depends on how the item is listed and the buyer’s location.

Even though Etsy handles collection, sellers should still:

• Track total sales and tax collected
• Understand whether their state requires informational or zero-dollar returns
• Stay aware of changes to state reporting rules

Does eBay Handle Sales Tax for Sellers?

So, does eBay collect sales tax for sellers? In most cases, yes — for states with marketplace facilitator laws.

eBay collects and remits sales tax on applicable marketplace transactions, but sellers remain responsible for:

• Filing taxes for eBay sales when required
• Reporting marketplace sales correctly on state returns
• Paying any applicable income taxes or platform-related fees

eBay also recommends working with a tax professional, which is wise given how much reporting varies by state.

Does Walmart Collect and Remit Sales Tax for Sellers?

Under the Walmart Marketplace sales tax policy, Walmart collects and remits sales tax in states with marketplace facilitator laws once applicable thresholds are met.

Initially, sellers may be responsible for sales tax until Walmart confirms the transition. After that, Walmart remits sales tax for sellers in accordance with state laws.

As with other platforms, sellers still need to monitor non-marketplace sales and maintain strong records.

State-by-State Marketplace Facilitator Rules

Marketplace facilitator laws vary by state, especially when it comes to economic nexus thresholds. While most large marketplaces exceed these thresholds everywhere, understanding the details matters — particularly for reporting.

Here’s a snapshot of marketplace facilitator laws by state for several major states:

• California: $500,000 in marketplace sales during a 12-month period
• Texas: $500,000 in total Texas revenue
• New York: $500,000 in sales and more than 100 transactions in a calendar year
• Florida: $100,000 in taxable sales
• Washington: $100,000 in gross receipts

Notably, the only states without marketplace facilitator laws are Oregon, Montana, New Hampshire, and Delaware — though some states without a statewide sales tax, like Alaska, still have marketplace-specific rules.

Staying Compliant with Marketplace Facilitator Laws

Marketplace facilitator laws simplify sales tax — but they don’t eliminate responsibility. Sales tax compliance for marketplace sellers still requires attention, especially for businesses operating across multiple states or sales channels.

Here’s how sellers can stay compliant:

Maintain strong documentation

Keep detailed records of marketplace and non-marketplace sales, including where transactions occurred and how sales tax was handled. Good documentation makes audits far less stressful.

Use automation wisely

Sales tax automation tools can categorize transactions, apply correct rules, and integrate with POS and accounting systems. Automation improves accuracy and saves time — especially for multi-channel sellers.

Work with a tax professional

State-by-state rules, changing thresholds, and reporting requirements make sales tax complex. A tax professional can help assess nexus, determine filing obligations, and create a clear compliance plan.

No matter where or how you sell, The Sales Tax People are here to help. We simplify your sales tax, guide you through changing regulations, and give you confidence that your compliance is handled — so you can focus on growing your business.

Simplify your sales taxes. Protect your business. Partner with The Sales Tax People.

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Updated – Originally published April 23, 2025

Thinking about moving to Florida—or starting a business in the state? Understanding how sales tax works is essential for making informed financial decisions. Florida imposes a combination of statewide and county-level sales taxes that affect residents, businesses, and visitors alike.

Before diving into the details, here is a quick overview of the key facts for 2025.

Quick Summary: Florida Sales Tax (2025)

Statewide Rate: 6%
Local Surtax: 0.5%–2.5% (varies by county)
Average Combined Rate: ~7.05%
Car Sales Tax: 6% + applicable county surtax
Counties With Some of the Highest Rates: Miami-Dade (7%), Orange (7.5%), Hillsborough (7.5%)
Common Exemptions: Groceries, prescription drugs, medical supplies

What Is the Sales Tax in Florida? (2025 Rate)

Florida imposes a 6% statewide sales tax on most retail sales of tangible goods and certain taxable services.
In addition, every county has the option to levy a discretionary sales surtax of 0.5% to 2.5%, which is added on top of the base rate.

This means that depending on the county, total sales tax in Florida ranges from:

• Low end: 6.5%
• High end: 8.5%

Florida’s average combined rate—7.05%—is slightly above the national average.

What Determines How Much Sales Tax You Pay in Florida

Several factors affect how much sales tax consumers and businesses ultimately pay. These include:

• The type of goods or services purchased
• The county where the transaction occurs
• Residency or delivery location
• Eligible exemptions or tax-free periods
• Whether the purchase is online or in person

Each of these variables can meaningfully change the total tax owed on a transaction.

Taxable vs. Exempt Goods and Services in Florida

Florida taxes most retail goods but exempts many essentials. Some key rules include:

Common Exemptions

• Groceries for home consumption
• Prescription medications
• Medical equipment and supplies
• Certain clothing items under $60 (varies by exemption period)
• School books and educational materials

Common Taxable Goods and Services

• Prepared food and restaurant meals
• Most clothing over $60
• Rental or lease of tangible personal property
• Hotel stays and short-term lodging
• Certain services, including commercial cleaning and repairs

Since Florida taxes few services compared to other states, understanding which categories are taxable is especially important for service-based businesses.

Sales Tax by County: Dade, Orlando, Tampa & More

Because each county may impose a discretionary surtax, two identical purchases can be taxed at different rates depending on where they occur.

Examples:

• Miami-Dade County: +1% surtax → 7% total
  
• Orange County (Orlando metro): +1.5% surtax → 7.5% total
  
• Hillsborough County (Tampa area): +1.5% surtax → 7.5% total
  
• Counties with no surtax: 6% base only

Businesses with multi-county operations must track county-specific rates to ensure accurate collection and remittance.

Do Residents and Non-Residents Pay Different Sales Tax in Florida?

Generally, residents and visitors pay the same sales tax on in-state purchases.
However, Florida offers specific exemptions that may apply to non-residents if:

• The item is shipped directly to an out-of-state address
• The purchaser is not benefiting from Florida-funded services

Important distinction:
Visitors making purchases while physically in Florida are required to pay the same tax as residents.

Florida Sales Tax Exemptions and Discounts

Florida provides a wide variety of exemptions that reduce the tax burden on certain industries and consumers.

Examples of Exempt Goods

• Groceries
• Prescription drugs
• Medical devices
• Newspapers
• Agricultural supplies and equipment
• Manufacturing equipment in certain cases

Local Discounts

Some counties offer early-payment discounts on surtaxes.

Businesses that qualify for exemptions must maintain proper documentation, as required by the Department of Revenue.

Sales Tax on Online Purchases in Florida

Florida requires remote sellers (out-of-state businesses) to collect the state’s 6% tax plus any applicable county surtax if they exceed economic nexus thresholds.

What this means for consumers:

• Online purchases are taxed the same as local purchases
• The tax rate is based on the delivery address, not the seller’s location

Florida also enforces use tax, requiring individuals to self-report tax on untaxed out-of-state purchases—though most major online retailers now collect tax automatically.

Car Sales Tax in Florida

Florida taxes vehicle purchases at:
6% state tax + the county surtax where the vehicle is registered.

Example:
A car bought in Miami-Dade County is taxed at 7%, while a vehicle bought and registered in Orange County may be taxed at 7.5%.

Out-of-State Vehicle Purchases

Florida residents who buy a car in another state must still pay Florida use tax when registering the vehicle—minus any sales tax already paid to the other state, up to Florida rates.

Sales Tax and Tourism in Florida

With tens of millions of visitors annually, tourism significantly drives Florida’s sales tax revenue.

How Tourists Pay Sales Tax

Visitors pay the same tax as residents on:

• Retail purchases
• Prepared food
• Event tickets
• Lodging and rentals

However, many tourists benefit from:

• Florida’s tax holidays
• Duty-free purchases at ports
• Price differences between counties

Tourism-heavy counties frequently adopt higher surtax rates.

How Sales Tax in Florida Affects Businesses

Sales tax impacts Florida businesses in multiple ways:

1. Compliance Burden

Businesses must track:

• County surtax rates
• Rule changes
• Exemptions
• Filing deadlines

This can be challenging for multi-location or multi-state sellers.

2. Pricing Strategy

Businesses must decide whether to:

• Display tax-inclusive pricing (rare in the U.S.), or
• Add tax at checkout

Both options affect customer perception.

3. Cash Flow Management

Collected tax must be held until remittance, which can strain businesses with:

• Seasonal revenue cycles
• Tight cash flow

4. Record-Keeping Requirements

Businesses must keep detailed records of:

• Taxable and exempt sales
• County-based transactions
• Online vs. in-person sales

Failure to do so may trigger penalties.

5. Profit Margins

Sales tax can influence:

• Margins on high-volume products
• Consumer price sensitivity
• Inventory sourcing decisions

How Sales Tax in Florida Affects Residents

Sales tax also influences day-to-day life for Florida residents.

Cost of Living

Higher county surtaxes directly raise the price of taxable goods.

Purchasing Power

Sales tax reduces discretionary income, especially for price-sensitive households.

Fairness and Equity

Sales tax is often viewed as regressive because low-income households spend a greater proportion of income on taxable goods.

Discretionary Spending

High surtax counties may see reduced consumer spending on:

• Dining
• Entertainment
• Retail shopping

Tax Holidays

Florida runs several tax-free holidays each year, encouraging strategic consumer purchases.

Cross-Border Shopping

Residents near Georgia or Alabama sometimes shop across state lines if lower tax rates apply.

Understanding Florida’s Sales Tax System in 2025

Florida’s sales tax system affects virtually every person and business in the state—from pricing strategies and cash flow to tourism spending and household budgets. With county surtaxes varying widely, staying informed is essential for accurate budgeting, compliance, and financial planning.

Whether you’re a resident, business owner, or visitor, understanding how sales tax works in Florida helps you make smarter purchasing and operational decisions.

The post What Is the Sales Tax in Florida? appeared first on The Sales Tax People.

The post What Is the Sales Tax in Florida? appeared first on VAYA TAX & BUSINESS CONSULTANTS.

Updated – Originally published February 5, 2025

Many service-based businesses assume sales tax doesn’t apply to them because they aren’t selling physical products. But depending on the type of service and the state you operate in, your services may be taxable—and failing to collect sales tax can lead to penalties, interest, and compliance issues.

As states continue shifting from goods-based to service-based economies, more and more services fall under state sales tax laws. This guide breaks down how sales tax applies to services, which service categories are taxable, and how to determine your sales tax obligations as a service provider.

What Is Sales Tax on Services? The Basics Explained

Traditionally, sales tax applied only to tangible personal property (TPP)—things you can touch, like clothing, tools, or electronics. But today, many states also tax a wide range of services, including business services, repairs, recreation, and even digital offerings.

Unlike goods, sales tax on services varies significantly across states, and the rules can be confusing:

• Some states tax very few services.
• Others tax almost all services by default.
• Many fall somewhere in the middle with selective taxation.

Because of these inconsistencies, service providers often misunderstand their obligations.

Common Myths About Sales Tax on Services

1. “Services are never taxed.”
   False. Many states tax certain services, even if others are exempt.
2. “Service businesses must collect sales tax in all states.”
   No. You only need to collect sales tax in states where you have nexus and your service is taxable.
3. “Service businesses get leniency from states.”
   Incorrect. If your service is taxable and you don’t collect tax, penalties apply the same as with goods.

6 Types of Taxable Services Businesses Should Know

Although taxability varies by state, most taxable services fall into the following categories:

1. Business Services

Includes advertising, consulting, financial services, and computer services.
These services support business operations rather than consumer needs.

2. Professional Services

Provided by licensed experts such as accountants, lawyers, engineers, and medical professionals.
This category is least likely to be taxed—but there are notable state exceptions.

3. Personal Services

Services used for personal care or daily living, such as:

• Beauty treatments
• Childcare
• Pet grooming
• Educational services

4. Tangible Personal Property (TPP) Services

These services improve, repair, or modify physical items, such as:

• Equipment installation
• Automotive repair
• Tailoring and alterations

5. Real Property Services

Services performed on real estate or land:

• Construction
• Cleaning and janitorial
• Landscaping
• Pest control

6. Amusement and Recreation

States frequently tax services involving entertainment, including:

• Concerts
• Sporting events
• Amusement parks
• Live theater

Which Services Are Exempt from Sales Tax?

Professional and personal services are the categories most commonly exempt, unless a state explicitly includes them.

Example:
In Utah, haircuts, accounting services, and legal work are exempt, while sporting events and recreational services are taxed.

Because exemptions differ by state, always confirm taxability with the state’s tax authority or a sales tax advisor.

Why States Tax Some Services but Not Others

Sales tax rules for services differ because:

• States have full authority to define taxable transactions.
• There is no federal sales tax to standardize rules.
• Tax policy often shifts based on industry growth and political climate.

As service-based industries grow, some states expand their tax base to generate revenue—leading to broader taxability.

States That Tax Services (and Those That Don’t)

States With No Sales Tax

• Alaska
  
• Delaware
  
• Montana
  
• New Hampshire
  
• Oregon

States That Tax Services by Default

These states tax nearly all services unless specifically exempted:

• Hawaii
  
• New Mexico
  
• South Dakota
  
• West Virginia

All Other States

The remaining 41 states do not tax services by default, but many impose sales tax on specific service categories.

Rule of thumb:

• In these states, assume a service is not taxable unless the statute says it is.

Does Your Service Business Need to Collect Sales Tax?

To determine whether you must collect sales tax, evaluate two factors:

1. Do You Have Nexus in the State?

Nexus is created by either:

• Physical presence (employees, offices, contractors, or locations), or
• Economic activity (meeting revenue or transaction thresholds).

If you have nexus, you must collect sales tax if your service is taxable in that state.

2. Is Your Service Taxable in That State?

Each state defines service categories differently.
You need to review:

• State statutes
• Taxability lists
• Department of Revenue guidance

3. Are You Following Current Legislation?

Sales tax laws—especially for services—change frequently.
Don’t rely on historical rules or assumptions.

How to Calculate and Collect Sales Tax on Services

Once you determine your service is taxable and you have nexus:

1. Register for a sales tax permit in the state.
2. Determine the correct tax rate (state, county, city).
3. Collect sales tax at the point of sale.
4. Remit sales tax based on your filing schedule.

Because taxability and rates vary, many service companies partner with a sales tax professional to ensure accurate calculation and compliance.

Sales Tax Compliance Requirements for Service Companies

If you establish nexus, you must:

• Register for a sales tax license
• Collect sales tax when required
• File returns (monthly, quarterly, or annually)
• Maintain accurate transaction records

Failure to collect or remit sales tax can lead to:

• Penalties
• Interest
• Estimated assessments
• Potential audits

Point-of-sale systems and digital recordkeeping tools can reduce errors and streamline compliance.

Special Sales Tax Rules for Bundled, Out-of-State, and Digital Services

Service businesses face unique tax scenarios. Here are three common complications:

1. Bundled Transactions (Goods + Services)

Examples:

• A salon selling a haircut + styling product
• A handyman providing painting + paint supplies

In many states, if the taxable portion of a bundle exceeds 50% of the total, the entire sale is taxable.

2. Out-of-State Service Providers

You may need to collect sales tax even if you’re performing services outside your home state.

• Physical nexus is less common.
• Economic nexus may still apply if your service sales exceed thresholds.

3. Digital Services and SaaS

Taxability varies sharply by state:

• Some states treat SaaS as taxable like TPP.
• Others exempt digital services unless other services are taxed.
• Rules are evolving quickly.

Service providers should closely monitor digital tax legislation or consult a sales tax professional.

Get Professional Help with Service-Based Sales Tax Compliance

Navigating sales tax obligations as a service business can be overwhelming due to varying state rules and constant legislative changes.
The dedicated team at Peisner Johnson / The Sales Tax People specializes in helping service-based businesses determine taxability, establish nexus, register for permits, and stay fully compliant.

Contact us to learn how we can support your business.

FAQ: Sales Tax for Service Businesses

Q1. Are services taxable in all states?

No. Only some states tax services. A few states tax services by default, while others only tax specific service categories.

Q2. What services are most commonly taxed?

Repair, maintenance, personal care, amusement, and real property services are commonly taxable. Professional services are often exempt.

Q3. How do I know if my business has sales tax nexus?

You have nexus if your business has a physical presence or exceeds a state’s economic threshold.

Q4. Do digital services and SaaS require sales tax?

It depends. Some states treat digital services like tangible goods and tax them; others do not.

Q5. How can I stay compliant with varying service tax laws?

Monitor legislation, maintain accurate records, use sales tax automation tools, or work with a sales tax consulting partner.

The post Sales Tax as a Service Business: What You Need to Know appeared first on The Sales Tax People.

The post Sales Tax as a Service Business: What You Need to Know appeared first on VAYA TAX & BUSINESS CONSULTANTS.