U.S. sales taxes: are your digital products impacted?

Several U.S. states have introduced taxes on digital products. Is your company impacted by these new regulations, even if it doesn’t have a physical presence on American soil?

Until recently, U.S. sales and use taxes were primarily applied to tangible property. However, as the digital economy has grown, several states have reviewed their tax rules to include software, subscriptions and certain online services.

California, for example, is slated to adopt significant changes as of January 2027. It is essential that leaders of Canadian companies that do business with the U.S. understand the consequences of these changes.

Why do U.S. states have different tax rules?

Unlike Canada, where a sales tax (GST) applies on a national level under federal legislation, the United States does not collect a general federal sales tax on goods and services. Instead, sales taxes are applied at a state level and each state has its own tax system.

As a result, downloaded software, a subscription or cloud computing service may be taxable in one state and exempt in another. Therefore, you must verify the tax rules of each state where you make sales or use digital products.

What will change in California in 2027?

As of January 1, 2027, California will expand its definition of tangible personal property to include certain digital products. The taxation of such products will no longer be determined based on the delivery method alone.

In practical terms, software may be subject to sales tax if it is delivered on tangible storage media or downloaded or accessible remotely on an online platform, in particular.

Take, for example, a Quebec company that markets to Californian clients a subscription service which gives online access to a cloud-based artificial intelligence solution. To date, these sales were exempt from tax, since no tangible property was transferred as part of the subscription. Under the new standards, they will be subject to sales and use tax, with certain exceptions.

Where an organization has a sufficient connection (nexus) with California, even where there is no physical presence, it may be required to register with the tax authorities, collect the applicable taxes and file tax returns.

Which other U.S. states have modified their tax rules?

Other U.S. states have recently expanded their taxation of several digital products and services.

• Maine applied a tax to audio and video broadcasting services as of January 1, 2026.
• As of July 1, 2026, certain digital content, online gaming services and software are taxable in Utah.
• Starting on January 1, 2027, electronically delivered books and certain subscription solutions will be taxable in Colorado.

Does your business have to collect taxes, even if there is no physical presence in the U.S.?

A Canadian business may have tax obligations in a U.S. state even if it has no offices, employees or facilities in that state. A sufficient presence (nexus) is required to create compliance obligations.

There are two main types of connections.

• A physical nexus derives from a concrete presence in the state in the form of offices and employees, for example. However, even the presence of agents and permanent or temporary solicitation activities in a state could be sufficient to create a physical nexus.
• An economic nexus is determined based on the volume of sales or number of transactions involving clients in the state, even where the company carries out all its activities in Canada. Sales thresholds and their calculation methods also vary from one state to another. Several states have set thresholds at US$100,000 while the equivalent in California is generally US$500,000.

As a result, business leaders must separate two elements: whether a product is taxable and whether the company is required to collect the taxes. Where a product is taxable, this does not automatically mean that all the sellers are required to collect taxes.

What are the main risks if you fail to meet your tax obligations?

If your business is required to collect taxes and you fail to do so, the tax authorities could claim the amounts owed in addition to levying interest and penalties.

The risk is even greater where the taxpayer fails to comply, since the normal limitation period may not start to apply. Under the applicable rules, the authorities could therefore go back several years to determine the amounts due.

Therefore, your organization could accumulate a tax debt without even knowing they had tax obligations in a U.S. state.

How can you ensure your organization is complying with U.S. tax rules?

If you sell digital products or services in the U.S., you should examine several elements to determine your tax obligations.

• The nature of your products: are they taxable in the states where you market them?
• The breakdown of your sales: in which states are your products actually deployed or made accessible? What is your turnover in these states?
• The existence of a nexus: does your company have a sufficient physical or economic connection to collect taxes?
• Your previous obligations: when should you have registered for sales taxes and filed tax returns, where applicable?

This analysis allows you to determine your obligations, pinpoint the tax risks and, where required, rectify your situation while continuing to identify strategies that could offset the impacts on your organization.

The specialists at Raymond Chabot Grant Thornton can guide you through evaluating your tax risks, determining your obligations and taking the required remedial action, in addition to respecting your compliance obligations to the U.S. tax authorities.

Do you sell digital products or services to the U.S. and would like to determine your tax obligations? Contact us!

By Kariane Brouard, Tax Lawyer at Raymond Chabot Grant Thornton.