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tax on digital downloads

sgrohitsgrohit Member
in General edited March 2008
I'm going to start selling digital music files very soon, but realized that I don't quite have a handle on the associated tax protocol and legalities of doing so. Apparently, some states started taxing digital music downloads awhile ago:

I know FoxyCart can tax same-state purchases based on ZIP code. But I'm not sure if/how the same protocol should be applied to digital downloads. Can somebody outline the basic regulations for me or maybe point me to a good primer on the subject?

Thanks for any help.
  • lukeluke FoxyCart Team
    Thanks for posting. We don't currently have any resources off hand to help you with this but we're definitely interested in the discussion as we'll be redesigning our tax system in the future to handle various juristictions and international needs and this question will definitely come up.

    Feel free to bump this thread with whatever you find out.
  • Well, at least I know California doesn't tax them. I just bought a track from Amazon, with no tax indicated on the receipt.
  • This is turning out to be a question without a straightforward answer. The link I posted before noted that some states have started to tax iTunes (and similar e-commerce), but articles like this indicated that enforcement and reporting are difficult.

    Assuming that I need to for some states, how would I go about setting state-specific tax rules? Am I right that FoxyCart can't yet handle such behavior?
  • lukeluke FoxyCart Team
    Not yet. That's part of the tax redesign I mentioned.

    Taxes suck.
  • Disclaimer: I am not a tax lawyer. Don't trust anything I say. I'm probably wrong. :)

    You should only need to collect sales tax from customers that are in your home state (ie. where you have nexus). In some cases you might just collect taxes at your one home state+county+city rate for everyone in the state (origin based tax) keeping it simple -- but this varies. Some of your customers may have to pay "use tax" on their own, but that almost never actually happens in real life that I know of.

    The possibility of a federal level sales tax scares me...unless sales taxes are streamlined to the point of making it simple to pay tax to all the correct states/counties/MTAs/cities/etc at all their myriad different rates, rules, and basically have to pay someone a lot to not make mistakes and still have time to run your business. (Then again, I actually did state sales tax filings for a company with locations in 20 states and hundreds of counties, as an intern when I was 17 at my first job, when the Controller quit. That was interesting...thankfully, we were never audited.)
  • Thanks, tookings. That's helpful information. I won't quote you on it, though. :)

    It would be great to know what other FoxyCart users who sell digital goods have been doing in this regard.
  • brettbrett FoxyCart Team
    A California-based FoxyCart user that sells digital downloads charges tax on them for CA only, like tookings mentioned. They checked with their accounting people and it seems that works for them.
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