In most states, sales tax usually applies to sales of tangible personal property and selected services.  Since sales tax first began in the 1930’s the definition of tangible personal property has evolved significantly and continues to change as technology pushes us further into the digital world.

A recent decision by the Mississippi Supreme Court (Mississippi Department of Revenue v. EKB, Inc. No. 2021-SA-00441-SCT (Miss. 2022)) shows the importance of understanding how tangible personal property is defined in a sales tax jurisdiction.  The Court upheld relief granted by a lower court to a wedding photographer who was assessed over $65,000 for taking still digital photographs that were later transferred to customers by various tangible means, usually DVD’s or flash drives.  The photographer paid sales tax on all tangible personal property, including the DVD’s and flash drives they consumed in providing their services.  The Department of Revenue assessed sales tax on the basis that the photographs were transferred via tangible means, thus making the transaction subject to sales tax as a sale of tangible personal property.

The court noted that the digital photographs were not tangible personal property because while Mississippi statutes defining tangible personal property included some digital products, digital still photographs were not among the digital products specifically cited in the statute (Miss. Code Ann. § 27-65-26 (3)).  Furthermore, the court concluded that even though the photographs were transferred via tangible media, the tangible media was incidental to the services provided.  Therefore, since photography services are not recognized as a taxable service in Mississippi (Miss Code. Ann. § 27-65-23) there was nothing about the transactions that were taxable. 

In the final analysis, understanding how digital products factor into the definition of tangible personal property in your taxing jurisdiction can result in significant tax savings.     

The following states tax some or all digital products:  Alabama, Arkansas, Arizona, Colorado, Connecticut, District of Columbia, Hawaii, Iowa, Idaho, Indiana, Kentucky, Louisiana, Maryland, Maine, Minnesota, Mississippi, North Carolina, Nebraska, New Jersey, New Mexico, Ohio, Pennsylvania, Rhode Island, South Dakota, Tennessee, Texas, Utah, Vermont, Washington, Wisconsin, and Wyoming.

States that exempt most digital products include California, Florida, Georgia, Illinois, Kansas, Massachusetts, Michigan, Missouri, North Dakota, Nevada, New York, Oklahoma, Virginia, and West Virginia.  

Any questions should be directed to your state and local tax professional.   

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