By Peter G. Pupke, Esq., Checkpoint News
The Minnesota Department of Revenue has issued an industry guide explaining the state sales and use tax treatment of digital products. The industry guide replaces Sales Tax Fact Sheet No. 177. A digital product is a product transferred electronically to a customer. Transferred electronically means the purchaser accesses or obtains the product in a way other than a tangible item, for example a USB drive. Common ways to transfer electronically include: downloading; streaming; and receiving a product by email. Prewritten computer software is always considered tangible personal property. This is true no matter how the software is transferred to the purchaser. (Digital Products, Minn. Dept. Rev, 09/26/2025, released October 2025.)
Taxable Digital Products
Specified digital products, other digital products, and digital codes are taxable, including:
- Digital audio works, either live or prerecorded, such as music, songs, speeches, audio books, and other sound recordings.
- Digital audiovisual works such as movies, music videos, news, entertainment, and live or prerecorded events This does not include digital photos.
- Digital books or e-books such as novels, biographies, and dictionaries. This does not include periodicals, magazines, newspapers, blogs, or other news and information products.
- E-Greeting cards.
- Online games.
- Digital codes that give the purchaser access to the digital products listed previously. This does not include gift cards or similar products.
Prewritten computer software is always considered tangible personal property. This is true no matter how the software is transferred to the purchaser.
Bundled Transactions
A bundled transaction occurs when taxable items and nontaxable items are combined and sold for a single price. The sale is taxable unless the price of the taxable item or service is minimal. To be minimal, the seller’s purchase price or sales price for the taxable products must be 10% or less of their total purchase or sales price for the bundled products. To determine if a transaction is taxable, sellers must use their purchase price or the sales price, and not a combination of the two.
Nontaxable Sales
A digital product is not taxable when both are true: (a) it is transferred electronically; and (b) it is not listed in the above definitions of specified digital products, other digital products, and digital codes.
Nontaxbale digital product examples include:
- Access to digital news articles.
- Charts and graphs, for example PDFs.
- Digital photos and drawings.
- Logos and designs.
Webinars
Charges for live or pre-recorded webinars are taxable unless they meet all of the following requirements:
- Presentation is accessed electronically.
- Online participants and the presenter can interact with each other while the participants view the presentations.
- If there is also an in-person event, admission to the in-person presentation is not taxable and any limits on the amount of interaction (and when it occurs) are the same for both online and in-person participants.
Online Classes
Online classes a student attends as part of a course of study at a post-secondary school, college, university, or private career school are not taxable.
Textbooks and Instructional Materials
The following items are exempt: (1) textbooks for use in a course of study at a school, college, university, or private career school; and (2) Instruction materials, including digital audio clips and audiovisual clips, for use in a course of study at a post-secondary school, college, university, or private career school.
Sourcing Digital Products
The sale or purchase of a digital product takes place when the seller transfers possession to the purchaser or when the product is first used, whichever comes first. For tax purposes, the sale of a digital product occurs at, or is sourced to, the purchaser’s address the seller has on file. If a taxpayer is located in or makes sales into an area with a local tax, the taxpayer may owe local sales or use tax.
Multiple Points of Use (MPU)
Someone who buys digital products may source the sale to multiple locations. Employees or other agents of the buyer may use the digital products at the same time in locations both inside and outside of Minnesota. The buyer must know at the time of purchase that the items will be used at the same time in more than one taxing jurisdiction to claim this exemption. Multiple points of use may be claimed for digital codes, if the products to be obtained with the code will be used both inside and outside of Minnesota. The buyer must provide their vendor with a completed Form ST3, Certificate of Exemption and specify the Multiple points of use exemption.
Reporting Use Tax
The buyer is responsible for apportioning and remitting the tax due to each taxing jurisdiction using any reasonable apportionment method. The buyer must apply the method in a consistent, uniform manner, and justify it through supporting records.
Industrial Production and Capital Equipment
Materials used or consumed in the industrial production of a retail product, including digital products, are exempt from tax. Machinery and equipment used to make digital products may qualify for the capital equipment exemption. To buy these materials or equipment exempt from tax, the purchaser must provide a completed Form ST3, Certificate of Exemption.
Non-Fungible Tokens (NFTs)
Non-Fungible tokens (NFTs) are subject to sales and use tax when the underlying product (goods or services) is taxable in Minnesota. NFTs may entitle purchasers to receive products or services including but not limited to:
- Digital products such as music, audio visual works, or video games.
- Admission to sporting events or concerts.
- Prepared food and beverages.
- Tangible personal property such as collectibles or memorabilia.
Virtual Currency
Sales of virtual currency are not taxable. If the virtual currency is redeemed for a taxable item or service, tax is due on the value of the consideration received by the seller.
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