You figured out where you owe sales tax. Now comes the question most sellers don’t see coming: is what you’re selling even taxable there?
You sell a $75 hoodie to a customer in Texas. No tax issue. Same hoodie, same price, to a customer in New York — also no tax. Ship it to Pennsylvania — still no tax. Send it to California — now you owe tax.
Same product. Same price. Four different states. Three of them exempt clothing. One doesn’t.
This is the part of sales tax that trips up even experienced sellers. You’ve done the work of figuring out where you have a sales tax obligation. Now the second question hits you: is what you’re actually selling even taxable in that state?
The answer depends entirely on the state — and sometimes on the price, the customer, or how you describe the product on the invoice. Let’s break it down.
The Two Questions Every Seller Has to Answer
Sales tax compliance is really two separate problems, and most people conflate them.
Question One: Do you have a sales tax obligation in this state at all? This is the nexus question. Economic nexus thresholds, physical presence — we covered all of this in the Economic Nexus blog. If you haven’t read it, start there.
Question Two: Is what you’re selling taxable in that state? This is the taxability question. And it’s a completely separate analysis.
You can have nexus in a state and owe zero tax because your product happens to be exempt there. And you can have a product that’s taxable in 40 states but exempt in the 10 that happen to matter most for your business. The two questions live in parallel.
| THE KEY DISTINCTION Having nexus in a state doesn’t automatically mean you owe tax there. Your product still has to be taxable. That’s a separate check — and it depends entirely on the state. |
Picture a seller running three product lines through the same online store: a branded physical item they ship out, an on-demand digital course, and an on-site professional service. All three just crossed economic nexus thresholds in six new states. What’s actually owed in each state turns out to be a different answer for each product line — even within the same state.
Category 1: Tangible Goods
Tangible goods are physical products you can hold. A hoodie, a tool, a box of office paper, a piece of equipment. This is the category where most sellers feel comfortable, because the general rule is simple: tangible personal property is taxable.
But there are categories within tangible goods where states have made very deliberate exceptions — and if your products fall into one of those categories, the rules get specific fast.
Clothing and Apparel
Clothing is the most common example of a tangible product that doesn’t behave like you’d expect.
Most states tax clothing the same as any other physical product. California, Texas, Florida, Georgia, and roughly 30 others — clothing is taxable, full stop. If you sell apparel into those states and you have nexus, you collect tax.
But a meaningful group of states have carved clothing out as exempt, or partially exempt:
→ Pennsylvania — most clothing is fully exempt from sales tax. No price threshold. A $20 t-shirt and a $500 coat are both exempt. The exceptions are formal wear, athletic uniforms, and items made from real fur.
→ Minnesota, New Jersey, Vermont — clothing is exempt, with similar carve-outs for athletic gear and formal wear.
→ New York — clothing under $110 per item is exempt from New York’s 4% state tax. At exactly $110, the full tax applies to the entire amount. A $109 hoodie: no state tax. A $110 hoodie: $4.40 in state tax. County-level taxes vary — some counties follow the exemption, others still charge local tax.
→ Massachusetts — clothing is exempt up to $175 per item. Above that, only the amount over $175 is taxed (so a $200 jacket has $25 taxable). Very different math from New York.
| EXAMPLE Take an $85 branded hoodie sold into six new nexus states. Texas: taxable. Florida: taxable. New York: exempt from state tax (check local county). Pennsylvania: exempt. Minnesota: exempt. Georgia: taxable. Three of the six states don’t require tax collection on this product at all. That isn’t a guess — it’s the law. And collecting tax where you’re not supposed to is just as much of a problem as not collecting where you are. |
The takeaway with clothing: you cannot apply a single “taxable” or “exempt” tag to an apparel product across all states. It has to be mapped state by state, and in some states, it even needs to be mapped price point by price point.
Groceries and Food
Food has similar complexity. The baseline rule in most states is that groceries — unprepared food you take home and cook — are exempt or taxed at a reduced rate. But “food” is defined very differently depending on the state, and the line between taxable and exempt food is one of the most litigated areas in sales tax.
→ Texas — most food for home use is exempt. But snack food with little nutritional value (candy, certain chips) is taxable, and hot food prepared for immediate consumption is taxable.
→ Tennessee — food is taxed, but at a lower rate (4%) compared to the standard rate (7%). Candy, soft drinks, and dietary supplements are taxed at the full rate.
→ Idaho — food is taxed at the full 6% state rate, with no grocery-specific reduction. Idaho residents can offset some of this with an annual grocery tax credit on their state return, but that doesn’t change what a seller collects at checkout.
→ Mississippi — reduced its grocery tax from 7% to 5% effective July 1, 2025, under the Build Up Mississippi Act (HB 1). The 5% rate applies to SNAP-eligible groceries; non-SNAP items remain taxable at the full 7% rate. That SNAP-eligibility line is its own product classification question sellers need to get right.
→ Alabama — reduced its state grocery tax from 4% to 2% in two phases, in 2023 and 2025. The current state rate is 2%, plus whatever local taxes apply on top. Alabama also ran a temporary grocery tax holiday from May through June 2026, suspending the state portion entirely for that window — a reminder that even a settled-looking rate can move again with little notice.
→ Illinois — the state eliminated its 1% grocery tax entirely on January 1, 2026. Some municipalities have adopted a local 1% replacement tax, so the effective rate varies by city — but the state rate itself is zero. Candy, soft drinks, and food prepared for immediate consumption are still taxed at the full general rate regardless of the grocery exemption.
If you sell food products of any kind, the category your specific product falls into matters enormously. A protein bar might be exempt as a grocery in one state and taxable as a supplement in another.
Other Common Exemptions
Beyond clothing and food, many states have specific exemptions for:
→ Prescription drugs and medical devices — exempt in virtually every state
→ Agricultural supplies — seeds, fertilizer, farm equipment (often exempt in farming-heavy states)
→ Manufacturing equipment — machinery used in production is exempt in many states
→ Resale items — products purchased to resell are exempt if you have a valid resale certificate on file
Shipping and Handling Charges
There’s one more wrinkle inside tangible goods that catches almost as many sellers as the clothing rules: is the shipping charge itself taxable?
The general pattern is that shipping follows the product — if what’s in the box is taxable, the shipping charge that gets it there is often taxable too. But a few states break from that pattern entirely, so it’s worth checking state by state rather than assuming.
→ Texas — shipping and delivery charges on a taxable sale are always taxable, whether you list them separately on the invoice or fold them into the price. There’s no way to structure around it.
→ California — a separately stated shipping charge is generally exempt. That’s the only condition. No requirement to use a third-party carrier, and no requirement to match your actual cost. The exemption applies whether you ship via FedEx or your own vehicle.
→ Pennsylvania — shipping is exempt only if two conditions are both met: the charge is separately stated, and the customer has the option to pick up the item. Online-only sellers with no pickup option typically owe tax on shipping even when the product itself is exempt.
| EXAMPLE Take a seller charging a flat $9 shipping fee on every order, sent by common carrier and listed as its own line on the invoice. In Texas, that $9 is taxable right along with the product — no way to separate it out. In California, if the product is already exempt (say, as clothing), the $9 shipping charge rides along exempt too. In Pennsylvania, the product might be exempt — but for an online-only seller with no pickup option, the $9 shipping charge is still taxable, even though the product it’s carrying isn’t. This is the state where most sellers get surprised. |
The safest habit either way: always list shipping as its own line item, using the word “shipping” or “delivery” rather than “handling.” It won’t make shipping exempt everywhere, but it puts you in the best position in every state where a separate listing is what the exemption depends on.
Category 2: Services
Here is where most service businesses get caught off guard.
In the US, the long-standing rule was: services aren’t taxable. Sales tax was designed for physical goods. If you were providing a service — consulting, legal work, cleaning, design — you generally didn’t collect sales tax.
That rule is still largely true. But it’s eroding quickly, and the exceptions are big enough to matter.
States That Tax Many Services
→ Hawaii — the most extreme example. Hawaii’s General Excise Tax applies to almost every business transaction, including most services. If you do business in Hawaii, nearly everything you sell is taxed.
→ New Mexico — the Gross Receipts Tax also applies broadly, including to most services. Similar to Hawaii in scope.
→ South Dakota — taxes a wide range of services. Combined with its role in the Wayfair case, South Dakota has become a state where service sellers can quickly find themselves with obligations.
→ Texas — taxes specific categories of services, including data processing, information services, certain IT services, and amusement services. Not all services are taxable — but the categories are real.
Most States: Taxable vs. Non-Taxable Depends on the Category
In the majority of states, the rule is more nuanced: some services are taxable, and some aren’t. Which ones depend entirely on how the state has classified them.
Examples of services that tend to be taxable across many states:
→ Repair and maintenance services — fixing a machine, altering clothing, repairing a roof
→ Amusement and recreation services — gym memberships, sporting events, ticket sales
→ Parking and storage
→ Landscaping and lawn care (in several states)
Examples of services that tend to be non-taxable in most states:
→ Professional services — legal, accounting, consulting, financial advice
→ Medical and healthcare services
→ Educational services
→ Real estate services
| EXAMPLE Take an on-site safety consulting service: checking workplace conditions, writing up recommendations, training employees on site. Pure professional service.In most states with nexus in this scenario — Texas, Florida, Georgia, Pennsylvania, Minnesota, New York among them — professional consulting isn’t subject to sales tax.The wrinkle: if the same invoice bills for “safety equipment installation” instead of “consulting,” that can tip into a taxable service category in a state like Texas. The line between “consulting” and “installation” on an invoice can change the tax treatment entirely. |
That last point is important. How you categorize and describe what you’re selling on an invoice can affect whether it’s taxable. A “consulting day” and an “installation and setup” might represent identical work, but one may be taxable and one may not. This is why contract and invoice language matters for sales tax.
Category 3: Digital Products
This is the most complicated category, and it’s moving the fastest. Digital products — online courses, software, streaming subscriptions, e-books, downloadable files — were created long after most state sales tax laws were written. States have been scrambling to figure out how to treat them ever since.
The result is a genuine patchwork. The same digital product can be taxable in one state, exempt in the next, and somewhere in a grey area in a third.
The Basic Split
At the highest level, states fall into three camps:
→ Taxable — the state has explicitly included digital products in its sales tax base, or treats them as equivalent to physical goods. Alabama, Arizona, Arkansas, Colorado, Connecticut, Georgia, Idaho, Indiana, Minnesota, Mississippi, New York, North Carolina, Pennsylvania, Texas, Washington, Wisconsin, and others.
→ Exempt — the state has explicitly excluded digital products, or they fall outside the definition of taxable property. California, Florida, Massachusetts, Michigan, Missouri, New Jersey, Virginia, West Virginia, and others.
→ Unclear or evolving — states where the law doesn’t clearly address digital goods, or where recent rule changes mean you should verify current guidance rather than rely on older analysis.
Why the Same Product Can Have Three Different Answers
Even within a state that taxes digital products, the rules often make specific distinctions:
→ Downloaded vs. streamed — some states only tax a digital product when the customer permanently downloads it. Streaming access, where you rent access but don’t own the file, may be treated differently.
→ Pre-built vs. custom — a pre-written software program sold to multiple customers is often taxable. Custom software built for one specific client may be exempt as a professional service.
→ B2C vs. B2B — some states make exceptions for digital products sold to businesses for specific uses, exempting transactions that would be taxable to a consumer.
→ SaaS is its own question — a software subscription doesn’t automatically follow the rule for e-books or streaming. Some states tax SaaS as a digital product, some tax it as a service, and Texas taxes it as “data processing” at a partial rate (80%) instead of the full one. Check SaaS separately for each state — don’t assume it rides along with your other digital products.
Let’s look at a concrete comparison across the states most sellers actually care about:
| Product | California | Texas | New York | Pennsylvania | Florida |
| Online course / e-learning | Exempt | Taxable | Taxable | Taxable | Exempt |
| Downloaded e-book | Exempt | Taxable | Taxable | Taxable | Exempt |
| SaaS subscription | Exempt | Taxable (data processing) | Taxable | Taxable | Exempt |
| Streaming video subscription | Exempt | Taxable | Taxable | Taxable | Exempt |
| Downloadable software (canned) | Exempt | Taxable | Taxable | Taxable | Exempt |
| Custom software development | Exempt | Exempt (may be service) | Exempt (service) | Exempt (service) | Exempt |
Note: these are general rules based on current state guidance. Digital product taxability changes frequently — always verify current rules for your specific product before configuring your tax settings.
| EXAMPLE Take a pre-built online safety training course: customers pay a fee, log in, and complete it on their own schedule. No instructor, no customization, no physical delivery.Texas: taxable — Texas treats online courses and digital content as taxable.California: exempt — California doesn’t tax digital products.New York: taxable — New York treats this as a sale of a digital product.Florida: exempt — Florida doesn’t tax digital downloads or access to online content.Same course. Same price. Sold from the same site. Four states with nexus, two different outcomes. |
Before Any of This: Are You Even the One Responsible?
Everything above assumes the seller is the one collecting and remitting the tax. If you sell through a marketplace — Amazon, Etsy, Walmart Marketplace, eBay — that assumption may not hold.
Every state with a sales tax now has a marketplace facilitator law. In plain terms: once a marketplace qualifies as a facilitator under state law, the state requires the marketplace itself to calculate, collect, and remit sales tax on behalf of every seller using it — not the individual seller. The marketplace becomes the one applying all the taxability rules covered in this post, and the one sending the money to the state.
This is genuinely good news for a lot of sellers. If a seller sold their product exclusively through Amazon, Amazon would decide whether it’s taxable in each state and collect accordingly — the seller wouldn’t need to touch it.
The catch: most sellers aren’t exclusive to one channel. The moment a seller adds a marketplace channel alongside their own site, sales split into two buckets: marketplace sales, where the platform handles tax, and direct sales through the seller’s own site, where the seller still handles it. Mixing the two up is one of the most common overpayment and underpayment mistakes we see.
The Drop-Ship Wrinkle
There’s a similar “who’s actually responsible” question when a third-party supplier ships directly to your customer instead of you.
Say a seller doesn’t keep inventory and instead has a supplier print and ship products directly to the customer. Now there are three parties, possibly in three different states: the seller, the supplier, and the customer. Two questions come up.
→ Does the supplier charge the seller tax on that transaction? Generally no — the seller can give the supplier a resale certificate, since the seller isn’t the end user of the product, it’s reselling it to the customer.
→ Does the seller charge the customer tax? Yes, if the seller has nexus in the customer’s state and the product is taxable there — the same analysis as any other sale, regardless of who physically shipped the box.
The resale certificate is the piece that trips people up. Without a valid one on file with the supplier, the supplier may end up charging the seller tax on a sale that was never meant to be taxed at that stage — and getting that money back after the fact is a lot harder than getting the certificate right at the start.
The Bundling Problem
Here’s a scenario that comes up constantly: what if you sell a combination of taxable and exempt items together?
Say a seller packages a physical product with access to a digital product — one price, one transaction. What’s taxable?
This is called a bundled transaction, and how it’s taxed depends on the state and what makes up the bundle:
→ Some states tax the entire bundle if any part of it is taxable — even if most of the value is in the exempt component.
→ Some states require you to separate the taxable portion and apply tax only to that piece.
→ Some states look at the “predominant character” — if more than half the value is taxable, the whole thing is taxable. If more than half is exempt, the whole thing is exempt.
The practical fix for most sellers: keep your taxable and exempt products on separate line items. A single bundled price that mixes taxable and exempt goods creates ambiguity in almost every state. Separate line items give you clear documentation and avoid the bundling analysis entirely in most cases.
Product Classification: The Hidden Setting in Your Cart
This is where all of the above actually shows up in your business operations.
If you use Shopify, WooCommerce, BigCommerce, or any other e-commerce platform, you have the ability to assign a product tax code to each item you sell. That code tells the tax engine how to classify the product and apply the right rules in each state.
Most sellers either skip this step entirely, or set everything to “taxable” and move on. Both approaches create problems:
→ Setting everything to taxable means you’re overcharging customers in states where your product is exempt. Customers who notice will dispute the charge. More importantly, collecting tax you’re not supposed to collect still creates a liability — you’re now holding money you need to remit somewhere, and it’s not always obvious where.
→ Setting everything to exempt means you’re undercharging in states where your product is taxable. The tax you should have collected is now your problem. States can assess it against you directly.
The right approach is to classify each product accurately and update the classification whenever your product mix changes or state laws shift. This sounds like more work than it is — once it’s set up, it runs on its own.
How to Figure Out Taxability for Your Products
There’s no single lookup table that covers every product in every state. But here is a repeatable process:
1. Identify your product categories
Group your products by type: physical goods, services, digital products. Within physical goods, flag anything that might fall into an exemption category — clothing, food, medical, agricultural, manufacturing equipment.
2. List every state where you have nexus
This is your compliance universe. You only need to worry about taxability in states where you’re actually required to collect.
3. Research taxability for each product category in each nexus state
Start with your highest-revenue states. For digital products and services, check whether the state has updated its rules recently — this category changes fast. State department of revenue websites, TaxJar, or Avalara’s taxability guides are good starting points.
4. Apply the right product tax codes in your platform
Once you know how each product is classified, map it in your cart. Most platforms use standardized tax codes (like TIC codes or Avalara tax codes) that translate your product into each state’s specific rules automatically.
5. Review when your product mix or state laws change
Product taxability isn’t a one-time setup. States update rules regularly. Digital product laws in particular have shifted in multiple states over the past two years, and more changes are expected. Set a calendar reminder to review your taxability settings at least once a year.
One More Question: Which Tax Rate Applies
Nexus tells you where you owe tax. Taxability tells you what you owe tax on. There’s a third question sitting underneath both of them: which tax rate applies?
Most states are destination-based — you charge the rate where your customer receives the item, down to the county and city. A handful of states, including Texas and Virginia, use origin-based sourcing instead for sales made within the state: the seller charges their own local rate to every in-state customer, no matter where in the state that customer lives.
Here’s the part that matters most for a growing seller: origin-based sourcing generally only applies to sales within your own home state. Once you’re shipping into a new state as a remote seller, you almost always fall back to destination-based sourcing there, regardless of what your home state does. Your home rate doesn’t travel with the package.
This is a big enough topic to earn its own post. For now, the rule of thumb: your home state’s sourcing rule applies to home-state sales, and destination-based sourcing applies almost everywhere else you have nexus.
One More Layer: Exemption Certificates
We’ve focused on product taxability — whether the item itself is taxable. But there’s a second reason a sale might be exempt that has nothing to do with the product.
If your customer is a business buying for resale, a government entity, a non-profit, or a manufacturer buying materials for production, they may be entitled to purchase without paying sales tax. They give you an exemption certificate, you keep it on file, and you don’t charge tax on that sale.
The critical thing here:
→ Get the certificate before or at the time of the sale — not after. A retroactive exemption claim is much harder to defend in an audit.
→ Keep the certificate in your records for as long as the state’s audit lookback period — typically 3 to 4 years.
→ Verify it’s valid for the state where the transaction is taking place. A certificate issued in Ohio doesn’t automatically exempt the sale in Texas.
Without a valid exemption certificate on file, the state can hold you responsible for the tax on that sale — even if your customer genuinely qualified for the exemption. The certificate is your protection. Keep it.
Final Takeaway
Nexus tells you where you owe sales tax. Taxability tells you how much. They’re separate questions, and you need to answer both.
The good news: once you’ve mapped your products correctly, the system runs on its own. You set up the product codes, configure your platform, and the right tax gets applied at checkout automatically.
The part that requires attention: the initial setup, the annual review, and any time you add a new product category or expand into a new state. Those moments are when the taxability question comes back — and you want to have the answer before you start collecting, not after.
If you’re not sure how your products are classified in the states where you’re registered, that’s worth a quick review. A miscategorized product either overcharges your customers or leaves you holding a liability. Neither is a problem you want to discover during an audit.
At Datastub, our sales tax compliance support helps sellers get this right from the start. If you want a straight answer on how your product line maps across your nexus states, reach out. We’ll tell you exactly where things stand.
| NOT SURE HOW YOUR PRODUCTS ARE CLASSIFIED ACROSS YOUR NEXUS STATES? We’ll map your product taxability state by state and make sure your cart is set up to collect the right amount — nothing more, nothing less. Free consultation, no pressure. |