Sales Tax Handling in Digital Product Sellers on Amazon

Introduction

Selling digital products on Amazon – like eBooks, music, or software downloads – means you must navigate a different world of sales tax rules. Unlike physical goods, digital goods are taxed inconsistently across U.S. states. This blog demystifies when, where, and how you need to collect and report sales tax on digital items in 2025.

Tax Code References

• Gross Income Inclusion (IRC § 61): Digital product income is fully taxable as gross receipts.
• Ordinary & Necessary Expenses (IRC § 162): You can deduct software subscriptions, platforms fees, hosting, and advertising.
• Sales Tax Rules (State-Level): No uniform IRC provision governs digital sales tax – it depends entirely on state laws.
• Marketplace Facilitator Laws: In many states, Amazon is responsible for collecting and remitting sales tax on behalf of digital sellers.

Relevant Forms

• Form 1040, Schedule C: Report income from digital product sales and related business expenses.
• Schedule SE (Form 1040): Calculate self-employment tax on net profit.
• Form 1040-ES: For quarterly estimated tax payments.
• State Sales Tax Return (where applicable): File in states where you collect tax directly (Amazon doesn’t remit for you).
• Amazon Tax Report: Used to confirm sales and tax collected on your behalf.

Detailed Example

Scenario: Maya sells eBooks on Amazon KDP and digital guides via her own website using Stripe. In 2025:

• Amazon Digital Sales: $80,000 (Amazon collects tax in 35 states)
• Own Website Sales: $40,000 (Stripe payments; Maya responsible for sales tax)
• Business Expenses: $15,000 (ads, web hosting, software tools)
• States with Nexus: CA, NY, WA

Tax Impact:

1. Gross Income: $120,000 reported on Schedule C.
2. Business Expenses (IRC § 162): Deduct $15,000
3. Net Income: $105,000 → Subject to income tax & SE tax.
4. Sales Tax:
   • Amazon Sales: Amazon remits sales tax under marketplace facilitator laws.
   • Stripe Sales: Maya must register, collect, and remit in CA, NY, and WA.

Step-by-Step Compliance Guide

1. Check Economic Nexus by State
   • Determine where you cross thresholds (e.g., $100,000 or 200 transactions).
2. Verify Amazon’s Tax Remittance
   • Review Amazon’s marketplace facilitator report to confirm what states are covered.
3. Register for Sales Tax Permits
   • Apply in states where you sell digital goods outside Amazon and meet nexus thresholds.
4. Collect Sales Tax via Your Platform
   • Use Stripe or other tools to configure tax rates and collect tax at checkout.
5. File Sales Tax Returns
   • Submit returns monthly or quarterly, depending on the state.
6. Reconcile Reports
   • Match Amazon’s remittance data with your internal reports.
7. Claim Deductions
   • Record hosting, software, subscriptions, and advertising on Schedule C.
8. Pay Estimated Income Taxes
   • Use Form 1040-ES quarterly to avoid IRS penalties.
9. Keep Good Records
   • Save platform tax reports, invoices, and remittance confirmations.

Conclusion

Selling digital products on Amazon requires understanding both federal tax rules and inconsistent state sales tax laws. By confirming what Amazon remits, registering for state sales tax where required, and setting up proper collection on your own platforms, you ensure complete tax compliance while maximizing profitability.

Want to Simplify Your Digital Sales Tax?

Don’t let digital tax complexity derail your growth. Get expert help from a CPA who understands digital products and e-commerce inside out.
Book a Free Strategy Call with Anshul Goyal, CPA

Disclaimer

Anshul Goyal, CPA, EA, FCA, is a licensed Certified Public Accountant in the United States and admitted to practice before the IRS as an Enrolled Agent. He represents clients in IRS audits and litigation and is a cross-border e-commerce tax expert. This article is for informational purposes and does not substitute for legal or tax advice.

About Our CPA

Anshul Goyal brings deep knowledge of U.S. digital tax laws, helping creators, authors, and online educators stay compliant with ever-changing federal and state rules.

Frequently Asked Questions

1. Do I have to collect sales tax on digital downloads?
It depends on the state – some tax digital goods, others don’t.

2. Does Amazon collect and remit for me?
Yes, in most states under marketplace facilitator laws – but confirm with Amazon’s tax report.

3. What if I sell digital goods on my own website?
You must register and collect tax yourself where you have nexus.

4. Can I deduct website and hosting fees?
Yes – fully deductible as ordinary and necessary business expenses under IRC § 162.

5. How often do I file sales tax returns?
Varies by state – some require monthly, others quarterly or annually.