In the worst economic environment that states have confronted in decades, their budget proposals are targeting taxation of electronically delivered products and services. New York, North Carolina, Washington and Wisconsin have already signaled their intention to move forward with new taxes on the digital world during their 2009 legislative sessions. Similar proposals are expected to surface soon in up to twenty states. As companies concerned with taxation of software, services, and electronically delivered products evaluate the impact of such proposals on their purchases and sales, their opposition has grown.  

In 2008, eleven states considered legislation to impose tax on digital products. A coalition of companies that sell digitally delivered products and services was able to stave off such proposals in six states; but five states (Indiana, Nebraska, South Dakota, Tennessee, and Utah) were able to pass legislation imposing tax on the digital world. The total number of states that claim to tax some portion of the digitally delivered world has now climbed to twenty, but this number includes nine states that have asserted such products are taxable without any legislative authority for that position. Legal challenges are being considered in those nine states.  

Below is a summary of the proposals currently being considered in New York, North Carolina, Washington and Wisconsin, with pertinent observations on each.  

New York

On December 16, 2008, New York Governor David A. Paterson released a budget proposal that seeks to close the largest deficit in the state’s history. Included among the estimated 137 new or increased taxes and fees is a provision that would impose a new tax on a broadly defined set of digital products. The proposal to tax digital products is estimated to raise $15 million in new taxes and would take effect on June 1, 2009. The state is facing a $15.4 billion deficit.  

The budget proposal would impose sales tax on “any property or service of whatever nature, delivered to the purchaser through the use of wire, cable, fiber optic, laser, microwave, radio wave, satellite or similar or successor media, or any combination thereof. Digital product includes, but is not limited to, an audio work, audiovisual work, visual work, book or literary work, graphic work, game, information or entertainment service, storage of digital products and computer software.”  

Sutherland Observation: The digital tax proposal fails to follow the definitions of digital products that have been developed jointly by states and industry-members as part of the Streamlined Sales and Use Tax Agreement (SSUTA). Notably, New York would not limit tax to purchases made by end-users with the right of permanent use, as those limiting terms are defined in SSUTA. While the budget proposal limits imposition to products that are sold in a “retail sale,” it is not clear that this limitation would serve to eliminate tax on sales for resale when the products purchased for resale do not perfectly match the products being sold (e.g., products where an “enhancement” has been made by the retail vendor). Because the definition of taxable digital products is so broad, the proposal goes well beyond capturing downloaded music, books and movies, as would be the case were the state to utilize the Streamlined Sales Tax (SST) definitions. In addition to taxing these three categories, the proposal would impose tax on downloaded and online games, ringtones, digital photographs and graphics, as well as information and entertainment services. Even worse, the New York bill’s broad definition provides that the list of taxed items is not exhaustive but is simply illustrative of the type of things that will be subject to tax.

The digital tax proposal includes a provision that would require sales of digital products to be sourced on a destination basis, and would define destination to be where the digital product is transmitted to the purchaser or its agent, or from which the purchaser or its agent accesses the digital product. For sales of prewritten computer software not in tangible form, the proposal would source using a multiple-points-of-use (MPU) approach if the sales price of software is greater than $1,000 or the license covers ten or more sites. This approach would permit the vendor to collect tax on the portion of the receipt allocable to the various jurisdictions in the state in which the software will be used. Such MPU sourcing requires that the vendor obtain a completed MPU form within ninety days of delivering the software and operates to shift the burden of proving the jurisdictions to which the software was delivered to the purchaser.  

Sutherland Observation: MPU sourcing was repealed from the SST Agreement as businesses were unable to agree on a satisfactory approach to sourcing transactions that involve products capable of being used in more than one jurisdiction at a time.  


On December 10, 2008, the Wisconsin Legislative Fiscal Bureau released the Department of Revenue (DOR) budget request which includes a proposal for a new tax on digital products. Based on an estimated effective date of September 1, 2009, the proposed tax is expected to raise $4.7 million in 2009-2010 and $6.7 million in 2010-2011.  

While the Department has not released bill text, its budget request indicates that the proposal would impose tax on the SST definitions of specified digital products (which includes digital audio works, digital audio visual works and digital books). The proposal also seeks to impose tax on a broad category of digital goods that it identifies as “additional digital goods.” This phrase is defined to mean “video greeting cards sent by electronic mail, finished artwork, periodicals, and video or electronic games.” The proposal specifies that, for sales and use tax purposes, the sale, storage, use, or other consumption of a digital code would be treated the same as the sale, storage, use, or other consumption of any specified digital goods or additional digital goods to which the digital code relates. 

Sutherland Observation: Wisconsin’s proposed tax on “additional digital goods” goes beyond the definitions provided by the SST Agreement. While the business community was able to defeat Wisconsin’s digital goods tax proposal in 2008, the state’s dire budget forecast ($5.6 billion budget deficit for the biennium) will make passage of the digital goods tax proposal much more likely.  

North Carolina

The Revenue Laws Committee was scheduled to hear a presentation on taxation of digital goods on December 15, 2008. The hearing was postponed until January 7, 2009, but a copy of the presentation that was scheduled to be given reveals that the state is evaluating whether to impose tax on at least digital movies, books, music, games, information services, and software. Additional information about the proposal is not yet available but the state’s current budget deficit is predicted to exceed $1 billion in the current fiscal year and $3 billion in the next fiscal year.  

Sutherland Observation: While no bill language is yet available, the presentation prepared for the Revenue Laws Committee is a strong signal that the state will be considering a broad imposition on specified digital products and electronically delivered services.


In 2007 the Washington State Legislature directed the Washington Department of Revenue, with the assistance of a committee (“Committee”), to study the taxation of electronically delivered products.  

The Committee, which has met over the course of the past year, is chaired by Representative Ross Hunter (Chair of the House Finance Committee) and composed of other legislators, academics, industry, state tax administrators, and local government representatives.  

On December 5, 2008, the Department released a Study of the Taxation of Electronically Delivered Products (“Report”). The Report identifies the issues and complexities associated with taxation of electronically delivered products, to “help the Legislature make an informed decision on the taxation of digital products.”  

The Report offers three options for the Legislature with respect to digital products: (1) amend the definition of “tangible personal property” to specifically exclude digital products; (2) impose tax based on the Agreement’s “specified digital products” definition, and possibly the so-called “undefined” digital products; or (3) broadly impose tax on all items “transferred electronically” under a separate imposition statute.  

In her cover letter transmitting the Report to Representative Hunter and Senator Margarita Prentice (Chair of the Senate Ways and Means Committee), Revenue Director Cindi Holmstrom indicated a “general imposition approach … may be possible” if the legislation incorporates provisions that, among other things, would ensure conformity with the SST Agreement, provide certain business exemptions (to prevent pyramiding of sales tax), provide tax amnesty, and protect in-state server farms and data centers. Representative Hunter is known to favor a broad imposition approach. Though draft legislation has not yet been circulated, it is expected to be presented early in the 2009 session.  

Sutherland Observation: It seems clear that the Washington State Legislature will consider legislation that would impose sales and use taxes on a broad array of digital products, going well beyond those “specified digital products” defined in the Agreement. While most states that considered taxation of digital products in 2008 did so under the limited definition of “specified digital products” included in the SST Agreement, the four states that have already signaled their intent to tax downloads in 2009 are taking a broader approach that will inevitably include electronically delivered services beyond books, movies and music.