Sales Tax on Digital Goods Discussed With Department of Revenue

October 3, 2022

With the rapid growth in the sales of digital goods, this issue could eventually become a significant fiscal challenge for cities with local sales taxes.

Last week, staff from the League of Minnesota Cities and the Minnesota Inter-County Association met with staff at the Minnesota Department of Revenue to discuss how sales taxes — both state and local — will be accurately collected and remitted by vendors of digital projects.

The issue generally only applies to digital products and not to other physical products delivered to a physical address.

To determine the appropriate sales tax rate to apply to a purchase, sales tax collection software used by vendors uses the purchaser’s address and/or the nine-digit zip code to determine the correct tax rate.

Digital goods, including such offerings as online streaming services, do not need an address or zip code from a purchaser because the products are delivered via the internet. Many digital goods retailers do collect a five-digit zip code along with credit card information. However, the five-digit code is not sufficient to accurately determine the local sales tax rate that should apply to the purchase. With the rapid growth in the sales of digital goods, this issue could eventually become a significant fiscal challenge for cities and counties with local sales taxes.

Minnesota is a member of the Streamlined Sales Tax Project (SSTP) and its State and Local Advisory Council will be meeting in Nashville this week to discuss how to address this issue on a uniform basis.

The concerted effort of states involved in the SSTP to work together to establish sales tax administration and compliance standards to minimize the burden on vendors was essential in the U.S. Supreme Court Wayfair decision, which allowed states to compel online vendors to collect state and local sales taxes. The Minnesota Legislature has regularly updated its sales tax statutes to reflect recommendations of the SSTP.

Perhaps the clearest and most accurate policy response would be for vendors to collect a full address and/or nine-digit zip code from the purchaser. However, purchasers could refuse to provide that information.

Given that most retailers collect at least a five-digit zip code for credit card purposes, other policy responses would be to either require the vendor to collect sales tax from the purchaser based on the highest total sales tax rate or the lowest rate within each five-digit zip code. The former option would result in some purchasers paying more in sales tax than they would otherwise be required, while the latter would result in some purchasers within a city or county with a local sales tax not paying the full sales tax due. Both of those options create a host of ancillary policy issues that would need to be addressed.

The League will continue to work with the Minnesota Department of Revenue and will monitor the actions of the streamlined sales tax discussions and their decisions and will update members with future developments.