A Tale of Two Jurisdictions: Differing Approaches to Taxing Certain Types of Digital Goods

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Tax Policy

Bloomberg BNA regularly spotlights the insights of state and local tax attorneys at KPMG LLP. In this installment, Raj Lapsiwala discusses how the taxing authorities in Colorado and the District of Columbia apply sales and use tax to various digital goods.

Raj Lapsiwala

By Raj Lapsiwala

Raj Lapsiwala is a manager in the State and Local Tax Group in KPMG's Washington, D.C. office. The information in this article is not intended to be “written advice concerning one or more federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230 because the content is issued for general informational purposes only. The information contained in this article is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. This article represents the views of the author or authors only, and does not necessarily represent the views or professional advice of KPMG LLP.

Recent guidance issued by the Colorado Department of Revenue and the District of Columbia Office of Tax and Revenue illustrate the different approaches taken by states to subject (or not subject) digital goods to sales and use tax. Interestingly, neither one of these states specifically impose sales taxes on digitally-delivered goods, such as books, music, or videos.


Colorado generally imposes sales and use tax on the sale, use, storage or consumption of “tangible personal property.” In General Information Letter 17-013, the Colorado Department of Revenue notes that it generally (and historically) has treated the sale of digital goods as tangible personal property because “[digital] goods are not merely conceptual but have a physical existence that can be measured and physically manipulated.” For purposes of this specific ruling, the treatment extended to digital reports provided to consumers because the reports were not customized for a particular consumer. If the digital report was not customized, at least in the Department's view, it was treated as the sale of tangible personal property and not the sale of a service.

District of Columbia

Conversely, the District of Columbia explained in OTR Notice 2017-06 that it does not consider digital goods to be tangible personal property. Instead, the District noted that that the sale of certain digital goods may be subject to sales tax as a taxable service, such as data processing or information services. Specifically, OTR Notice 2017-6 states that digital music, books, and audio books are not considered to be tangible personal property or taxable services, and, therefore are not subject to sales and use tax. However, canned, prepackaged, and customized software, as well as applications, will be taxable as data processing services. The sale of digital news and digital periodicals will be taxable as sales of information services.

These rulings illustrate a couple of points. First, simply because a state does not specifically tax digital equivalents does not mean that that such items are not subject to sales and use tax as sales of “tangible personal property” or some specifically enumerated service that involves data or the furnishing of information. Second, even though the state has taxed data processing or information services since before digital goods were generally available and used, this does not mean that certain types of digital goods won't be considered taxable services.

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