Sales Tax on Digital Downloads Coming to a State Near You!

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The creeping Internet tax grab continues. If you sell on the Internet, then this is a tax you need to watch closely. There are now 18 states that require you to collect and pay sales tax for digital downloads. This isn’t just a tax for iTunes, it’s a tax for ANY digital downloads which includes special reports, audio products, webinars, you name it. The wider implications of this creeping nexus may surprise you.

If you are an Internet marketer and you have nexus in one of these 18 geographic areas, then you’re going to fall into this category. Look out! You can take a quick nexus test at US Tax Aid to see if you might have an issue.

As of today’s date, the following states have signed on to apply a sales tax to your digital purchases: Alabama, Arizona, Colorado, District of Columbia, Hawaii, Idaho, Indiana, Kentucky, Louisiana, Maine, , New Jersey, New Mexico, South Dakota, Tennessee, Texas, Utah, Washington, and Wisconsin.

Nexus isn’t even that clearcut anymore either. For example, some states have begun to reject the Supreme Court’s definition of physical presence in favor of “substantial economic presence.” And the rules have gotten more and more complicated. For example, what does “Substantial economic presence” mean?

The answer seems to be pretty subjective. In California, new changes to their laws means nexus occurs if you derive 25% or more of your gross revenue from California customers. But in Oregon, which doesn’t have a sales tax, business owners are being told that: Substantial nexus exists where a taxpayer regularly takes advantage of Oregon’s economy to produce income for the taxpayer and may be established through the significant economic presence of a taxpayer in the state. So, Oregon is saying that your business will have to file an income tax return and pay income tax on its earnings instead – IF you have nexus. But with such a fuzzy definition, how do you know? If you ask a state tax official, what answer do you think you’ll get?

Nexus is going to be “the” buzzword that business owners and consumers in 2010 and beyond. Understanding what it means, and how it impacts your business is going to become a critical factor in your continuing success.

If you’re confused about your business nexus, start with our 9-question Business Nexus test (you’ll find it over at Or, if you’re in town, why not come to this weekend’s seminar event, Smart Business: More Money, Less Tax in 2010.

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