Is my product taxable?
Most physical products are taxable by default — the question is whether your product falls into a specific exempt category in each state where you have nexus. The major exempt categories are unprepared food, clothing (in a handful of states), prescription drugs, and certain digital goods, each with state-specific definitions and carve-outs. Applying one taxability rule to all states is the most common and costly compliance error.
Most physical products are taxable by default. The question is whether your specific product falls into an exempt category, and whether that exemption applies in each state where you have nexus. The same product can be taxable in one state and exempt in another.
The default rule: taxable unless specifically exempt
Sales tax systems are built on inclusion, not exclusion. If a product is a tangible personal property and the state has a sales tax, it’s taxable, unless the state has passed a specific exemption for that product category.
This means the practical question isn’t “is my product taxable?” — it’s “does my product fall into one of the exempt categories in this state?”
The major exempt categories and how they work
Food and groceries
Most states exempt unprepared food, groceries you’d take home and cook. But the definition of “food” varies significantly:
- Candy and soda are taxable in most states that otherwise exempt food (they’re specifically carved out)
- Prepared food (restaurant meals, deli items, hot food) is taxable almost everywhere
- Dietary supplements: generally taxable, treated as non-food items in most states
- States with no grocery exemption: some states tax all food: Alabama, Mississippi, South Dakota, and a handful of others apply the full rate to groceries
If you sell food products, you need a category-level determination for each state, not just a blanket treatment.
Clothing and apparel
Most states tax clothing at the standard rate. The notable exceptions:
- New York: clothing and footwear priced under $110 per item (not per order) is exempt
- Pennsylvania: most clothing is exempt; accessories (handbags, belts) are not
- New Jersey: most clothing exempt
- Minnesota: most clothing exempt
- Vermont: clothing under $110 per item exempt (follows NY’s approach)
Athletic uniforms, protective gear, and costumes are often taxable even in states that exempt regular clothing. Accessories (jewelry, handbags, belts, wallets) are almost universally taxable even in clothing-exempt states.
Prescription drugs and medical devices
Prescription drugs are exempt in virtually every state. Over-the-counter drugs and medical devices vary, some states exempt them, others tax them at the full rate or a reduced rate. If you sell health products, check each state’s specific OTC and medical device rules.
Digital products and SaaS
Digital goods and software are a patchwork. There is no national standard:
- Some states tax all digital products (downloaded software, ebooks, streaming)
- Some states tax SaaS specifically
- Some states exempt digital goods entirely
- Many states are still actively revising their rules
If you sell digital products, software, or subscriptions, this category requires state-by-state research. See Are digital products and SaaS taxable? for the full breakdown.
How to determine your product’s taxability
Step 1: Identify your product category. Is it a physical good, a digital product, a service, or a subscription? Within physical goods: is it food, clothing, medicine, or something else?
Step 2: Check whether your category has a specific exemption in each state. The states where you have nexus are the only ones that matter. Most state revenue department websites have exemption guides by category.
Step 3: Use a product tax code. Tax code systems (like the ones built into Shopify, TaxCloud, Avalara, and TaxJar) assign a standardized code to product categories. The platform then applies the correct taxability rule by state automatically based on that code. This is far more reliable than configuring state-by-state manually.
Step 4: Watch for product-level variation within a category. A supplement company might have products that are taxable (vitamins) and products that are exempt (prescription-required formulas). A food company might have products that qualify as groceries (exempt) and products that qualify as candy (taxable). Don’t assume the entire catalog gets the same treatment.
The most expensive mistake: applying one rule to all states
The most common taxability error isn’t getting a single state wrong, it’s applying the same rule to all states. A clothing brand that treats all apparel as taxable is over-collecting in New York and Pennsylvania. A food brand that treats all products as exempt is under-collecting in Alabama and Mississippi.
Over-collection has to be refunded. Under-collection is owed to the state with penalties. Both cost money.
Related: Does taxability change by state for the same product?
Looking for more answers on this topic?
Browse Product Taxability