The global subscription economy is booming. It was estimated that 78% of adults worldwide had at least one paid subscription in 2025, whether to a streaming service, digital content, a software tool, or a tangible item. Companies like selling subscriptions because recurring revenue means they can accurately forecast income. And subscriptions can lower the amount of money a company has to spend trying to gain new customers.
But subscriptions also come with a unique set of sales tax and VAT (value-added tax) compliance issues that can't be overlooked.
States and countries across the globe have their own tax rules that businesses must follow, and failing to properly collect and remit tax as required can lead to audits and costly penalties.
How does sales tax work with subscription-based models?
When goods are sold on a subscription basis, the general rule is that sales tax is charged separately on each taxable transaction. However, there are a few nuances to be aware of:
- Billing cadence: Generally, you apply sales tax at the time of billing for each transaction. However, in some U.S. states, when customers choose an annual subscription or prepaid plan, you may be required to charge the full amount of sales tax up front. Other states allow sales tax to be collected throughout the payment period.
- Cancellations and refunds: When customers cancel part of a subscription, you may be required to refund sales tax for the unused time (if the full amount was paid at the time of the sale).
- Changes to customer location: Subscribers may change their place of residence while subscribed to your service. If so, you'll need to update the sourcing location for purposes of determining the applicable sales tax rate and rules.
Beyond these industry-specific sales tax issues, you'll need to follow general rules for sales tax compliance, including:
- Determining whether you have an obligation to collect sales tax in the locations where you're selling subscriptions.
- Determining whether your product is taxable.
- Calculating the tax rate you must charge on your subscription items.
- Determining whether you must charge tax on shipping and handling costs.
Calculating nexus when selling subscription-based services
You do not necessarily have an obligation to collect sales tax in every location where your customers reside. You are required to comply with local rules only if you have established nexus or meet the thresholds for registering for sales tax.
However, once you’ve established nexus in a specific state, you must register for sales tax and begin collecting and remitting sales tax payments on the state's required schedule.
There are two ways to establish nexus throughout the United States:
- Having physical nexus means that you have established a physical connection to a state. This could include having a brick-and-mortar retail establishment, a warehouse where you store goods, or even the regular presence of employees or salespeople.
- Having economic nexus means that you have sufficient economic connections to a state. Typically, this means you complete a certain number of transactions (such as 200 or more per year) or reach a certain volume of sales, such as $100,000 in annual revenue. (This state-by-state guide shows the thresholds for economic nexus across the U.S.)
Economic nexus is usually determined by sales made during the previous calendar year.
For subscription-based products, each recurring payment or each separate shipment is often counted as a separate transaction (depending on the state). So if a customer pays monthly for your subscription service, that would be considered 12 of the 200 transactions necessary to establish economic nexus.
Different rules apply for determining when you must register to collect VAT in countries that impose it, including EU (European Union) countries. If you’re selling subscriptions to international customers, you'll need to learn the rules for each location, or work with a company like Numeral, which can manage sales tax compliance for you in more than 70 countries.
Determining whether your subscription product is taxable
If you’ve established nexus in a location, you must then determine whether the products and services you're selling there are taxable. If they are, then you must charge the appropriate tax on each transaction.
The taxability of your products varies depending on many factors, including whether you're selling subscriptions involving physical goods, digital goods, or software as a service (SaaS).
Tax rules for subscriptions involving physical goods
Most physical goods are taxed in the majority of states, including home goods, furniture, toys, and appliances. However, most states also have exemptions. Common examples of items that may be exempt from sales tax include groceries, clothing, residential energy, and medications.
Unfortunately, even within exempt categories, there are many nuances to be aware of. For instance, while clothing isn't usually taxable, some states charge tax on luxury apparel. And there's more variation in tax rules for some items. As an example, Numeral provides sales tax compliance support to Grüns, which sells nutritional gummies. Depending on where a sale takes place, the product may be classified as a vitamin, a supplement, a non-taxable food, a general product, or medicine, each of which may be subject to different tax rules.
The goods you're selling may also fall into a gray area. Consider a meal subscription box sold in a state where groceries are taxable, but prepared foods aren't. Typically, if the box contains fresh or frozen ingredients in original packages, it's considered groceries, but if items are prepackaged, combined, precooked, or prepared in any way, they may be classified as prepared food, and different tax rules may apply.
Because of these complexities, careful research on the taxability of your subscription items may be required.
Tax rules for subscriptions involving digital goods
Many subscription services center around access to digital goods like music, e-books, apps, art, video games, online courses, streaming media, and digital tickets. The taxability of these items can be affected by:
- The type of item.
- Whether the product is downloaded or accessed online.
- Whether any physical items come with the digital goods, such as a CD for installation or a printed instruction book.
- Whether the digital item would be tax-exempt if sold in physical form (for example, newspapers and textbooks are often tax-exempt).
This state-by-state guide explains which states tax digital goods, as well as what rate applies.
The key thing to know is that in the vast majority of states, at least some digital goods are taxed, and if there's any physical material that goes with them, you will probably have to collect sales tax (unless the physical product is exempt).
Tax rules for SaaS subscriptions
SaaS is software that is hosted in one place and licensed for use by customers in another.
The taxability of SaaS is especially complicated because SaaS can be classified in different ways:
- Some states, including Texas and New York, classify SaaS as taxable, often by classifying it as prewritten software accessed remotely. These states typically require businesses to collect sales tax on SaaS products.
- Some states treat SaaS as an intangible, exempt service.
- In some states, the taxability of SaaS depends on specific details like what service is provided, how the software is delivered to customers, or whether the software is off-the-shelf or built for a specific customer.
To make things more complicated, in some states, SaaS subscriptions aren’t taxable at the state level but are taxable at the local level, for example, in Chicago.
This state-by-state guide to SaaS sales tax rules provides a breakdown of how states treat SaaS products. In around half of U.S. states, SaaS is exempt, but rules are evolving as states develop new rules.
Calculating the tax rate for subscription products and services
If you have nexus and the subscriptions you're selling are taxable, you must tax customers at the correct rate. Rates are set at the state and sometimes local level. In some cases, different products are subject to different tax rates. For example:
- While Pennsylvania applies a flat 6% rate on all taxable goods, certain counties, including Allegheny County and Philadelphia County, add an extra local tax. Many other state and local areas have similar arrangements.
- In Arkansas and some other states, there's a standard sales and use tax that applies to most items, but there's also a reduced tax on some food products and a higher excise tax on beer.
Understanding which rates apply to the products and services you're selling is critical, so you don't overcharge or undercharge when you tax your customers.
Shipping and handling charges
If you're mailing physical goods to customers on a subscription basis, you'll need to understand whether shipping and handling charges are subject to sales tax.
Rules vary by state, but in general:
- If you list shipping charges separately on invoices, shipping charges may be exempt from sales tax (if the product in question is taxable).
- When shipping is bundled with taxable items, the total amount of the sale is often taxable. For example, if you sell a subscription box for $50, including delivery, and the items in the box are taxable, you'd charge tax on the entire $50.
- When your service includes both digital and physical items, you may have to prorate tax based on the value of each category of item.
If you don't tax shipping and handling costs, tracking and documenting this carefully is critical.
Final thoughts
The rules for taxing subscription-based products are complex, and varied — there are far too many variations to list here.
The bottom line is this: If you have established nexus in a particular location and sell taxable products or services in that location, you must register for sales tax, collect the correct amount of sales tax on each transaction, and remit payments as required.
There may also be additional nuances to consider, such as proper documentation when selling to exempt customers.
Numeral can help you to comply with these obligations. We support many companies offering subscription-based products and services, including SaaS and digital items, and we make compliance effortless by tracking nexus, registering your company, collecting the correct tax, and filing and remitting payments on time.
