Digital goods are products delivered electronically rather than in physical form, and they cover a wide range of everyday purchases: downloaded music, streaming movies, ebooks, software, mobile apps, and NFTs, among others. For tax and legal purposes, they’re treated as intangible personal property, and the rules around what you’re charged, what you actually own, and what happens to your library over time work very differently from the rules that govern a paperback or a DVD.
Roughly 42 of the 52 U.S. taxing jurisdictions now impose sales tax on at least some digital goods, with combined rates ranging from under 2% to over 11% depending on where the buyer is located. What gets taxed, and at what rate, depends on both the type of product and the state you’re buying from.
What Counts as a Digital Good
The defining feature is electronic delivery. If you receive it over the internet instead of on a disc, cartridge, or printed page, it generally qualifies. The Streamlined Sales and Use Tax Agreement (SSUTA), an interstate compact adopted by about half the states, uses the term “specified digital products” and groups them into three buckets: digital audio-visual works (movies, TV shows, videos), digital audio works (music, podcasts, ringtones), and digital books (ebooks, digital periodicals).1Streamlined Sales Tax Governing Board. Digital Products Definition
Individual states define and tax digital products under their own statutes too, and some reach well beyond those three groups. The broader landscape usually includes:
- Audio-visual works you stream or download for personal viewing.
- Audio works, including music tracks, podcasts, audiobooks, and ringtones.
- Digital books, magazines, newspapers, and reference materials.
- Software and apps, whether downloadable programs, mobile applications, or video games.
- Digital images and templates, such as stock photography and graphic design assets.
What ties these together is that they exist as data on a server or device, and their entire lifecycle happens electronically.
NFTs and Digital Collectibles
Non-fungible tokens sit in their own subcategory. The IRS classifies all digital assets, including NFTs, as property rather than currency for federal tax purposes.2Internal Revenue Service. Digital Assets Selling or exchanging an NFT triggers a capital gain or loss, just like selling stock or real estate.
NFTs that represent digital artwork, trading cards, or similar collectible items face an extra wrinkle. Under IRS Notice 2023-27, NFTs qualifying as “collectibles” under Section 408(m) are subject to a maximum long-term capital gains rate of 28%, compared with the standard 20% ceiling for other capital assets.3Internal Revenue Service. Notice 2023-27 – Treatment of Certain Nonfungible Tokens as Collectibles Starting in 2026, brokers may also report certain NFT transactions on an aggregate basis when sales exceed de minimis thresholds.
Digital Goods vs. Digital Services
One of the trickier areas is the line between a digital good and a digital service. Download a movie to keep forever and it looks like a product. Stream the same movie through a monthly subscription that ends the moment you cancel, and it looks more like a service. The tax consequences can differ sharply.
Under the SSUTA framework, a state’s sales tax on specified digital products only reaches downloads unless the state’s law explicitly extends to subscriptions or temporary-access streaming. States that want to tax a Netflix-style service must include language specifically reaching that kind of transaction. A state can end up taxing your ebook purchase but not your music subscription, or the other way around, depending on how its statute is written.
Software as a Service (SaaS), programs you access through a web browser rather than install on your device, adds another layer. Roughly half of states tax SaaS in some form. Some treat it as tangible personal property, others as a taxable service, and others exempt it entirely. A handful only tax SaaS if the user actually downloads software as part of the transaction. The same cloud-based tool might be taxed in one state, exempt in the next, and taxed at a different rate in a third.
When You’ll Pay Sales Tax on a Digital Purchase
Most U.S. taxing jurisdictions tax at least some digital goods, but roughly 10 jurisdictions exempt them entirely, often by treating digital products as nontaxable services or intangible property. Even within taxing states, the specifics vary. Some tax all three SSUTA categories. Some tax downloads but not streaming. A few tax software downloads but exempt music and ebooks.
Tax authorities regularly issue guidance clarifying which specific products fall within their tax base. Whether a streaming subscription, a mobile app, or a digital magazine is taxable depends on the laws of the buyer’s location. The practical takeaway is to check the receipt: if you’re being charged sales tax on a digital purchase, it’s because your jurisdiction has specifically decided to tax that category.
Educational Exemptions
Several states carve out exemptions for educational digital materials. Digital textbooks, classroom software, and professional reference materials may qualify for reduced rates or full exemptions, mirroring longstanding sales tax breaks for physical textbooks and school supplies. Qualifying usually requires that the purchase be tied to a formal educational purpose rather than general personal use, and the specifics vary by state.
What You Actually Own When You Buy a Digital Good
When you buy a physical book, you own that copy. You can resell it at a garage sale, lend it to a friend, or donate it to a library. Digital purchases work nothing like that. Most digital goods are sold under an End User License Agreement (EULA) that grants you a limited, non-exclusive license to access the content. You’re paying for permission, not possession.
This matters because of the first sale doctrine in federal copyright law. Under 17 U.S.C. § 109, the owner of a lawfully made copy can sell or give away that particular copy without the copyright holder’s permission.4Office of the Law Revision Counsel. 17 USC 109 – Limitations on Exclusive Rights: Effect of Transfer of Particular Copy or Phonorecord But if you’re a licensee rather than an owner, courts have consistently held that the first sale doctrine doesn’t apply to you at all.
The leading case is Vernor v. Autodesk, where the Ninth Circuit set out a three-part test. You’re a licensee, not an owner, when the copyright holder (1) specifies that you’re granted a license, (2) significantly restricts your ability to transfer the software, and (3) imposes notable use restrictions.5United States Court of Appeals for the Ninth Circuit. Vernor v. Autodesk, Inc. Most digital storefronts check all three boxes. Your Kindle library, iTunes purchases, and Steam games are licenses that can be revoked if you violate the terms of service and that you generally cannot resell, lend, or transfer to another person.
This is where digital commerce catches people off guard. You can spend thousands of dollars building a digital library over a decade and still have no legal right to pass it along, sell it, or move it to a different platform.
DRM and Format Restrictions After Purchase
Digital goods are typically locked down with technological protection measures, whether encryption, authentication checks, or other code controlling access. Federal law makes it illegal to bypass these protections, even if you paid full price for the product. Under 17 U.S.C. § 1201, circumventing an access control on a copyrighted work is a federal violation regardless of whether you intended to infringe the copyright.6Office of the Law Revision Counsel. 17 USC 1201 – Circumvention of Copyright Protection Systems Selling or distributing tools designed to crack DRM is separately prohibited under the same statute.
The law carves out limited exceptions. Reverse engineering is permitted when necessary to make an independently created program work with a lawfully obtained one, and good-faith encryption research gets a similar safe harbor.6Office of the Law Revision Counsel. 17 USC 1201 – Circumvention of Copyright Protection Systems Beyond those, the Librarian of Congress grants temporary exemptions every three years for specific noninfringing uses. The rulemaking finalized in October 2024 permits circumvention in cases such as using short clips from lawfully purchased movies for criticism or education, extracting content for nonfiction multimedia ebooks, and certain text and data mining by university researchers.7Federal Register. Exemption to Prohibition on Circumvention of Copyright Protection Systems for Access Control
The practical effect is that even after you buy a digital good, you generally can’t convert it to another format or strip away access restrictions. The content stays tethered to the platform and player that delivered it.
What Happens to Your Digital Library When You Die
Because you hold a license rather than ownership, your digital library doesn’t automatically pass to your heirs the way a bookshelf full of paperbacks would. Most platform terms of service prohibit account transfers, and many providers will simply deactivate an account after the user dies.
Most states have adopted the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA), which gives executors some legal authority to manage a deceased person’s digital assets. But RUFADAA prioritizes privacy over convenience. An executor generally cannot access the content of electronic communications, including emails, text messages, and social media chats, unless the deceased explicitly consented to that disclosure. For other digital assets like photo libraries, purchased media, and cloud-stored files, the executor may need to petition a court and demonstrate that access is necessary to settle the estate.
RUFADAA creates a hierarchy for determining what happens to your digital accounts:
- Platform tools come first. If you used a built-in feature like Google’s Inactive Account Manager to designate what happens to your data, those instructions override everything else, including your will.
- Written directions come second. Instructions in a will, trust, or power of attorney override the platform’s default terms of service.
- Terms of service are the fallback. If you left no directions at all, the platform’s terms control, and most platforms’ terms don’t allow transfers.
If your digital purchases have real value to you or your family, name them in your estate plan and either leave login credentials with a trusted person or use whatever legacy tools your platforms offer. Without those steps, your executor may face months of court proceedings and still end up with limited access.