Taxing Digital Audio-Visual Products: The Evolution of Sales Taxation in the Digital Economy

As the digital economy continues to expand, the rise of digital content also transforms the traditional models of how artists and consumers sell and purchase art. Instead of renting a VHS at your local film shop, a family can stream it instantly without leaving their home. Small businesses can utilize accounting software directly from the cloud, without ever needing to purchase a CD. These small, but monumental, changes have not only impacted how we consume software, media, and art, but they have also altered how states and localities seek to tax these goods.

Under traditional principals of sales taxation, which were based on physical delivery of goods and chattels, the transfer of title or possession of tangible personal property was the fundamental threshold for imposing sales tax. Over time, states have gradually eroded that concept, recognizing the technological developments in the distribution and consumption of digital content, which was also causing a steep erosion in the base of transactions subject to sales tax.

Currently, most states now largely classify these items as taxable “digital goods,” which generally encompasses goods and services delivered or accessed electronically and may include items such as downloadable or streaming movies, audio/music products, presentations, photographs, video games, digital codes, subscriptions to digital serials, and so forth. At its broadest, the term could also be read to include digitally delivered services (e.g., information services, data processing services), including services related to the creation or modification of digital goods.

Effective beginning in 2024, Georgia became the latest state to impose sales tax on transactions involving “digital goods,” which the state defines broadly as encompassing digital audio-visual works, digital audio works, and digital books, including artwork, photographs, newspapers, magazines, and various other media.¹

Most notably, Georgia’s sales tax on digital goods applies when the customer receives “right of permanent use” — and excludes sales taxes if the transaction is “conditioned upon continued payment by the end user,” such as transactions involving subscriptions or other reoccurring fees.² As a result, Georgia sales taxes (ranging from 7% to 9%) will apply on sales of qualifying “digital goods” delivered to customers in Georgia if they have the right of permanent use of such digital goods. For example, the purchase of a film on a streaming platform (which includes the right of permanent use) could be subject to Georgia sales tax, while renting the same film may not.

States will continue to grapple with updating their tax regimes to address the sale of digital goods. Of course, these changes have also created widespread complexities, conflicting interpretations, and unresolved legal challenges — especially those arising from defining what constitutes a taxable versus non-taxable digital good, as well as how to geographically source a transaction for sales tax purposes. As the digital economy marches on, state and local governments will be sure to continue refining their perspective on the taxation of digital goods. In turn, both consumers and sellers of digital goods may likely face increased taxes and compliance obligations as a result.

[1] See 2023 Ga. S.B. 56 (amending O.C.G.A. §§ 48-8-2 and 48-8-30).

[2] See O.C.G.A. § 48-8-30(a)(2)(A).