Sales Tax on Digital Products 2026

The rules are changing fast. What used to be simple is getting complicated. And if you sell anything digital or provide services online, you need to pay attention right now.

Sales tax on digital products is expanding at a pace we haven’t seen before. Washington and Maryland are leading the charge. But they’re not alone. More states are watching, planning, and ready to follow.

This isn’t just about a few new rules. This is about a fundamental shift in how states think about taxing the modern economy. And businesses that don’t prepare are going to face expensive surprises.

Here’s the simple truth. State economies have changed. We don’t buy as many physical products as we used to. We buy software subscriptions. We stream movies instead of buying DVDs. We store files in the cloud instead of on hard drives.

But sales tax laws? They were written for the old economy. The one where you walked into a store and bought something you could hold in your hand.

States are realizing they have a problem. Their tax revenue isn’t keeping up with where the economy is going. So they’re updating their rules to match how people actually spend money today. Sales tax on digital products is becoming the new normal.

As Washington’s legislature put it in their recent bill, the state and nation have moved toward a more service-based economy. Sales tax reaches a narrowing share of economic activity. States need to modernize. And that modernization means taxing digital services.

Washington just made one of the biggest moves in digital sales tax history.

Starting October 1, 2025, Washington expanded its sales tax to cover a huge range of digital and tech services. We’re talking about advertising services (both digital and traditional, except for newspapers and broadcast media), information technology services like technical support and data processing, custom software development and website design, digital automated services that involve human effort, and temporary staffing services.

The state sales tax rate is 6.5%. But when you add local taxes, businesses could be charging customers more than 10% in some areas.

Here’s what makes this complicated. The law taxes services based on where the customer first uses them. That means businesses need to figure out the location for every single transaction. For companies selling services across state lines, that’s a compliance nightmare.

And there’s more. Businesses with $3 million or more in taxable retail sales during 2026 have to make a one-time prepayment in June 2027. That’s 80% of what they’ll owe for that month.

The Washington law is already facing legal challenges. Comcast filed a lawsuit arguing that the tax on digital advertising violates federal law because it treats internet advertising differently than traditional media. But here’s the thing. Maryland’s similar digital advertising tax survived legal challenges and is still being collected. Washington’s tax is moving forward as planned.

Maryland didn’t waste time either. On July 1, 2025, the state started taxing data and information technology services at 3%.

The Maryland tax covers software publishing services (both system and application software), computing infrastructure and data processing, web hosting and related services, custom computer programming and systems design, computer facilities management, and licensing of media or software rights.

Maryland’s approach is a bit different from Washington’s. The regular sales tax rate in Maryland is 6%. But these tech services get taxed at the lower 3% rate. It’s still a new cost for businesses that weren’t collecting any sales tax before.

One interesting piece. Maryland already had a controversial digital advertising tax on the books from 2021. Despite legal battles, they kept it. Now they’re expanding further into digital services. They’re showing other states that digital taxation can stick, even when it gets challenged.

Maryland also introduced something called a Multiple Points of Use Certificate. This lets buyers apportion tax when they use a service in multiple states. But it shifts the compliance burden. The buyer has to figure out how much tax they owe based on where they use the service.

This is where things get tricky. Every state defines sales tax on digital products differently. What’s taxable in Washington might not be taxable in Maryland. What’s considered “digital goods” in one place might be classified as “services” somewhere else.

Here are the main categories states are targeting:

Software as a Service (SaaS). Cloud-based software that you access through a web browser. Think project management tools, accounting software, CRM systems. Many states now apply sales tax on digital products like SaaS the same way they tax software you buy on a disk.

Digital goods. Things like ebooks, music downloads, digital photos, and streaming media. Sales tax on digital products in this category is becoming standard in more places because states see them as replacements for physical products that were always taxed.

Information technology services. This is the new frontier. We’re talking about cloud storage, web hosting, data processing, technical support, and IT consulting. States like Washington and Maryland are specifically targeting B2B services in this category.

Digital advertising. Both Maryland and Washington have gone after this. Digital ads on social media, search engines, and websites. Traditional advertising through newspapers, radio, and TV often gets exempted. That difference is causing legal problems.

Custom software and web development. Previously, many states only taxed prewritten software. Now custom development is on the table too.

The problem? These definitions overlap and contradict each other. A business selling the same service might owe tax in five states, owe nothing in three states, and face uncertainty in the rest.

If you sell digital services, you’re probably already feeling overwhelmed. And it’s about to get worse.

Here’s what businesses need to figure out:

Where do you have nexus? Nexus means you have a connection to a state that requires you to collect sales tax. Physical nexus happens when you have an office, warehouse, or employees in a state. Economic nexus kicks in when you hit a revenue threshold. That’s usually $100,000 in sales or 200 transactions. But some states have dropped the transaction threshold. Illinois did it in 2026. More states are following.

What are you actually selling? You need to classify every product and service correctly. Is it SaaS? Is it a digital good? Is it a professional service? The answer determines if you owe tax and at what rate.

Where is your customer using the service? Washington and other states source services based on where the customer first uses them. For digital services, that can be hard to track. Your billing address might be in one state. The customer might access the service from another. They might have employees in ten different states.

What rate do you charge? Washington has state and local rates that can exceed 10%. Maryland has a special 3% rate for tech services. Other states have their regular rates. And all of these rates can change based on the specific location within a state.

When did the law take effect? Washington’s changes hit October 1, 2025. Maryland’s took effect July 1, 2025. If you had existing contracts before these dates, special rules might apply. You need to know the exact timeline.

Do you qualify for any exemptions? Maryland exempts cloud computing for certain cybersecurity businesses. Some B2B transactions get exemptions in certain states. Nonprofit organizations might qualify for exemptions. You need to verify these case by case.

Washington and Maryland aren’t alone. The trend is clear. More states are coming.

Here are states that are actively discussing or proposing sales tax on digital products expansion:

California is having conversations about taxing SaaS, streaming services, and cloud-based services. With its massive economy and budget pressures, California could make a huge impact if it moves forward.

New York is reviewing whether SaaS and digital advertising should be fully taxable. They’re watching how Washington and Maryland handle the legal challenges and implementation issues.

Texas is looking at clearer guidance on data processing and remote-access software taxation. The state already taxes some digital services but is considering expanding the scope.

Georgia, Kansas, Pennsylvania, and Wyoming are all exploring sales tax base expansions that could include digital services. State legislators are watching Washington and Maryland closely to see how their approaches work.

Maine expanded its sales tax to digital audiovisual and audio services effective January 1, 2026. Streaming services are now taxable there.

The pattern is clear. States facing budget shortfalls are turning to digital services as a stable revenue source. It’s easier politically than raising income tax rates. And with more people buying digital products, the revenue potential is significant.

Let’s get practical. Here’s what you need to do right now.

Audit your product and service catalog. Make a list of everything you sell. For each item, determine if it could be subject to sales tax on digital products in any state where you have customers. Don’t guess. This matters.

Review where you have nexus. Check your sales by state for the last year. Do you exceed $100,000 in any state? Do you have inventory, employees, or contractors working in any state? Both create nexus.

Register in states where you have nexus and taxable sales. If you’re selling taxable digital services in Washington or Maryland and you have nexus there, you need to register now. The penalties for not collecting when you should can be severe.

Update your billing systems. You need to charge the right tax rate based on the customer’s location. This isn’t something you can handle with a spreadsheet anymore. You need proper sales tax software or professional help.

Review existing contracts. Both Washington and Maryland have special rules for contracts signed before their effective dates. You might be able to continue under old rules temporarily. But you need to understand when you’ll need to start collecting tax on those contracts.

Keep exemption certificates. When customers claim an exemption, get documentation. Keep these certificates for at least five years. If you get audited, you’ll need proof.

Watch for legal developments. Washington’s law is being challenged in court. If the challenges succeed, rules could change. But don’t count on it. Maryland’s similar tax survived challenges and is still being collected. Plan as if the tax is permanent.

Budget for compliance costs. Whether you handle this in-house or hire help, sales tax compliance costs money. You might need new software. You might need to hire someone who understands state tax rules. Factor this into your pricing.

Here’s what’s really happening. States are redefining what counts as tangible property versus services. For decades, most states only taxed physical goods. Services were mostly exempt.

That distinction made sense when our economy was based on manufacturing and retail stores. It doesn’t make sense anymore. Sales tax on digital products is becoming necessary as the economy shifts.

Think about it. If you buy Microsoft Office on a CD from a store, you pay sales tax. But if you subscribe to Microsoft 365 online, should that be exempt? States are saying no. Both should be taxed the same way.

The same logic applies to books versus ebooks. Music CDs versus streaming. Physical servers versus cloud storage. The function is the same. Only the delivery method changed.

States argue that exempting digital services creates an unfair advantage for online businesses over traditional brick-and-mortar stores. It also means they’re missing out on tax revenue as the economy shifts digital.

This isn’t going away. This is the direction state tax policy is heading for the next decade. More states will expand to digital services. The definitions will get clearer. The compliance requirements will get stricter.

Many businesses are making a dangerous assumption. They think sales tax on digital products only matters if they’re a tech company.

That’s wrong.

Do you use cloud-based accounting software? That might be taxable. Do you pay for cloud storage for your files? Taxable in some states. Do you hire a freelancer to build you a custom website? That could be subject to sales tax on digital products too.

This affects businesses on both sides of the transaction. If you sell digital services, you need to collect tax. If you buy digital services, you might see your costs go up.

And if you’re a business buying these services, you might have use tax obligations. Use tax is what you owe when you buy something from an out-of-state seller who doesn’t collect sales tax. Many businesses forget about this. But states are getting more aggressive about auditing use tax compliance.

Washington’s changes took effect October 1, 2025. Maryland’s took effect July 1, 2025. That means businesses needed to be ready months ago.

If you’re reading this and you’re not compliant yet, you’re already behind. The good news is it’s not too late to catch up. The bad news is the longer you wait, the more complicated it gets.

States usually have amnesty periods or penalty relief for businesses that come forward voluntarily. But once they find you through an audit, those options disappear. You’ll owe back taxes, penalties, and interest.

The stakes are high. Sales tax debt can add up fast. States can go back three to four years in most cases. If you’ve been selling digital services in Washington or Maryland without collecting tax, calculate what you might owe. It could be significant.

Here’s the truth. Sales tax compliance for digital products is complicated. The rules are different in every state. They’re changing constantly. And the penalties for getting it wrong are serious.

Most businesses don’t have in-house expertise for sales tax on digital products. Your bookkeeper probably doesn’t know the nuances of digital goods taxation across 50 states. Your lawyer probably isn’t a state tax specialist.

This is where working with a sales tax professional makes sense. Someone who tracks these changes daily. Someone who knows the exemptions, the sourcing rules, and the registration requirements. Someone who can help you avoid costly mistakes.

At Nexus, we specialize in helping businesses navigate exactly these kinds of challenges. We track state tax changes. We help clients understand what they need to do. And we help them get compliant before problems turn into crises.

If you sell any kind of digital product or service, here’s your action plan:

Step 1: Figure out what you’re selling. Classify each product and service. Understand which states might consider them taxable.

Step 2: Identify where you have nexus. Review your sales data. Look at where you have a physical presence or employees. Calculate your revenue by state.

Step 3: Research state requirements. For states where you have nexus and potentially taxable sales, research their specific rules. This takes time. Each state is different.

Step 4: Register where required. Don’t wait. If you need to collect tax in Washington or Maryland or anywhere else, get registered now.

Step 5: Update your systems. Make sure you can calculate and collect the right amount of tax based on customer location.

Step 6: Stay informed. These rules are changing fast. What’s true today might not be true in six months. You need to keep up.

Step 7: Get professional help. Don’t try to navigate this alone. The cost of getting it wrong is much higher than the cost of expert guidance.

The sales tax on digital products landscape is changing fast. Washington and Maryland are just the beginning. More states are coming. The definitions will keep expanding. The compliance requirements will get more complex.

Businesses that ignore this are taking a big risk. State tax agencies are getting better at finding businesses that should be collecting sales tax on digital products but aren’t. The data is easier to track. The enforcement is more aggressive.

But businesses that get ahead of this can turn compliance into a competitive advantage. You’ll avoid penalties. You’ll have cleaner books. You’ll be ready when more states expand their rules.

The question isn’t whether sales tax on digital products will be taxed more broadly. It will be. The question is whether your business will be ready.

If you’re selling digital products or services and you’re not sure about your compliance obligations, don’t wait. The rules are already in effect in multiple states. More are coming.

Reach out to us today. Let’s review your situation and make sure you’re compliant with sales tax on digital products. The consultation is free. The peace of mind is worth it. And the potential cost savings from avoiding penalties could be huge.

Don’t let sales tax compliance become a crisis. Get ahead of it now.Call Now For A Free Consultation – 720.878.2280

• All
• California Sales Tax Nexus
• Franchise Tax
• New Tax Laws
• Nexus Laws
• Nexus Rules
• Sales Tax
• Tax Nexus
• Uncategorized
• Voluntary Disclosure Agreement

Sales Tax Exemption Certificates: What Every Business Owner Needs to Know If your business sells to other businesses, schools, nonprofits, government[...] -

Dropshipping Tax: Who Owes What? Dropshipping sounds simple. You sell something, your supplier ships it directly to your customer, and you[...] -

From Amazon FBA to TikTok Shop: Sales Tax Nexus for Multi Channel Sellers in 2026 In 2026, selling on Amazon FBA,[...]