by TaxJar January 23, 2025
This guest post is from Kevin Permenter, a Research Manager with IDC ’s Enterprise Applications team.
The selling of digital goods and services are set to redefine the way the global economy works. As a result of the massive shift toward digitalization, the amount of non-physical digital goods (i.e. on-demand services, software, online gaming, e-books, music files, digital images, etc.) being sold has exploded. This explosion has caught the attention of business owners and tax authorities all over the globe. The U.S. sales and use tax system is already considered one of the most complex on the planet. This complexity emanates from the following factors:
This issue of complexity reaches new heights when dealing with digital goods and services at the state level. The definitions and terms are not universal from state to state, there is no uniformity on how to classify some digital services, and there are issues around the use intent (i.e. permanent use or non-permanent use). Lastly, business owners must cope with this confusion while knowing that the current situation may very well be completely different a year from now. The situation is rapidly evolving on a state-by-state basis which places incredible pressure on business owners to stay informed.
As always, the heaviest part of the burden from these new regulations on digital goods and services will fall on the SMB digital commerce retailers where tax management resources (e.g. time, money, people) are more limited. IDC believes that this burden places a heavy focus on affordable, cloud-based tax compliance software in the coming months, especially among smaller digital retailers. Here are a few things to look for when choosing a tax solution for the digital economy:
Many tax software vendors have invested a tremendous amount of resources in enhancing/launching products that address the taxation of digital goods and services. Many of them offer dedicated initiatives to provide tools and education for business owners as they navigate the digital goods and services taxation landscape as it continues to evolve. For example, TaxJar has made major investments in providing guidance, and tools for today’s digital business owner. These investments include:
The taxation of digital goods and services is currently still evolving and becoming even more complex. Both sellers and consumers of digital goods must work to understand their exposure to related taxes. It will be an uphill battle for companies who choose to cope with digital goods taxation via legacy approaches. It will be the companies that understand the importance of a modern tax compliance solution that will not simply cope with upcoming changes; they will thrive.
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