SaaS Sales Tax Guide

SaaS or “Software-as-a-Service” is a popular business model in today’s digitally advancing generation. However, digital advancements don’t go unseen as states keep their eye on cloud-based and SaaS businesses making sales in the USA.

So here’s the tricky part that most ecommerce businesses ask: How does sales tax apply to SaaS? The short answer is: The taxability of SaaS varies across states.

To help you understand its complexity, this comprehensive state-by-state guide provides everything you need to know about sales tax on SaaS and how businesses can stay compliant.

Key Takeaways

Software-as-a-Service is taxed differently across states depending on how it’s classified. Some states classify SaaS as an exempt service, while others classify it as a taxable digital good.
SaaS businesses should only collect sales tax once a sales tax nexus is established in a state.
Out of 50 states, 24 states, excluding NOMAD states, currently do not impose sales tax on SaaS. The District of Columbia, or Washington D.C., also applies sales tax on SaaS.

What is SaaS Sales Tax?

SaaS, short for Software-as-a-Service, is a business model providing electronic access to software. The software is hosted in one location, and the business offers users the option to purchase a subscription or license to access it. The SaaS provider owns, operates, and maintains the software application.

The customer only purchases access to the software through the internet and does not get ownership rights to download or modify the software application. For example, TaxHero is a SaaS-based business. Some other examples of SaaS businesses are Microsoft, Google Workspace, Slack, Adobe, and the Shopify platform.

Sales tax for SaaS businesses can be tricky and complex, as some states treat it as tangible personal property, similar to product businesses. On the other hand, some states consider it a service that may be subject to or exempt from sales tax depending on different factors. Learn more about sales tax on services in this blog.

How States Classify SaaS

The taxability of SaaS depends on how a state classifies it. In some states, they define SaaS as a service. Meanwhile, in other states, it’s classified as a digital good. Some states also tax SaaS based on usage, whether it’s for personal or commercial use.

Different states may also classify and tax Hybrid SaaS, such as Software plus Service (S+S), differently. This refers to cloud-based services combined with traditionally downloaded local files to support the service. Because of this service’s complexity, determining its taxability can be tricky unless you know each state’s specific ruling.

Which States Charge Sales Tax on SaaS?

To narrow down the complexity of SaaS sales tax, here is a state-by-state guide your business can use for reference.

STATE	IS SAAS TAXABLE?	SALES TAX RATE	SPECIFICATIONS
Alabama	No	n/a	SaaS is classified as a professional service in Alabama. Therefore, it is generally not taxable. Sales tax only applies when the seller transfers the software as the buyer’s tangible personal property. SaaS charges must be separately stated on the invoice, apart from the cost of purchasing the software’s license or subscription.
Alaska	Yes	up to 7.50% local sales tax	Alaska does not have a statewide sales tax. However, its local jurisdictions may impose sales tax on SaaS products.
Arizona	Yes	5.60%	Arizona transaction privilege tax (TPT) applies to software delivered electronically on a subscription basis, which is considered tangible personal property.
Arkansas	No	n/a	Not taxable in Arkansas if the service charges are stated separately on the invoice.
California	No	n/a	Exempt from sales tax in California if no tangible personal property is transferred to the customer.
Colorado	No	n/a	Generally exempt at the state level. However, local home rules may apply sales tax on SaaS products.
Connecticut	Yes	6.35%	SaaS is taxed at a full state sales tax rate when utilized for personal use. SaaS used by businesses (B2B) is taxed at a reduced rate of 1%.
Delaware	n/a	0%	None. There is no sales tax in Delaware.
Florida	No	n/a	SaaS is classified as an intangible service in Florida. It is taxable only when bundled with tangible personal property.
Georgia	No	n/a	Georgia classifies SaaS as a service. Generally, cloud-based software subscriptions are exempt from sales tax in Georgia.
Hawaii	Yes	4%	Hawaii’s general excise tax (GET) applies to certain goods and services, including SaaS.
Idaho	No	n/a	SaaS is not taxable in Idaho if the user has no permanent right to use the software.
Illinois	No	n/a	SaaS is generally not taxable at the state level in Illinois as long as it’s accessed remotely and no files are downloaded locally for the service to work. However, localities may impose local sales tax on SaaS. For instance, Chicago charges a 9% personal property lease transaction tax on SaaS products.
Indiana	No	n/a	Exempt if the customer has no ownership or control over the software or server.
Iowa	Yes	6%	SaaS is classified as a service in Iowa and is generally taxable when utilized for personal use. However, SaaS used for qualified commercial enterprises is exempt.
Kansas	No	n/a	SaaS is exempt from sales tax in Kansas if no ownership is transferred to the users, and they can only access the software remotely.
Kentucky	Yes	6%	Beginning January 1, 2023, SaaS is taxable in Kentucky. Services provided before the mentioned date remain exempt.
Louisiana	Yes	5%	Starting January 1, 2025, SaaS will now be taxable in the state of Louisiana. Additionally, transactions in which the customer pays a fee to use a website or software without owning it are also subject to sales tax. Digital Products (i.e., ebooks, downloadable video content, mobile apps) are also taxable.
Maine	No	n/a	SaaS is generally exempt from sales tax in Maine. However, prewritten and electronically delivered software is taxable.
Maryland	Yes	6%	SaaS purchased for personal use and delivered or obtained electronically is taxable in Maryland. Meanwhile, SaaS purchased for commercial use by an enterprise (B2B) is subject to a reduced sales tax rate of 3%.
Massachusetts	Yes	6.25%	SaaS is taxable in Massachusetts when it’s classified as prewritten software, regardless of whether it is accessed remotely or purchased as a subscription.
Michigan	No	n/a	In Michigan, SaaS is classified as a non-taxable service as long as the software is only accessible remotely.
Minnesota	No	n/a	SaaS is not taxable in Minnesota if the customer does not take ownership or possession of the software.
Mississippi	No	n/a	SaaS is not taxable in Mississippi if the software is stored on a server located outside the state. In-state hosted servers for SaaS are subject to a 7% state sales tax rate.
Missouri	No	n/a	SaaS is not taxable in Missouri if the software is exclusively delivered electronically. However, services required to maintain the software under the user’s purchase agreement are taxable.
Montana	n/a	0%	None. There is no sales tax in Montana.
Nebraska	No	n/a	SaaS is treated as a non-taxable service rather than taxable computer software in Nebraska.
Nevada	No	n/a	SaaS is not taxable in Nevada. Nevada does not consider electronically delivered software to be taxable tangible personal property.
New Hampshire	n/a	0%	None. There is no sales tax in New Hampshire.
New Jersey	No	n/a	SaaS is not taxable in New Jersey as long as it is not electronically delivered to the user. However, Software-as-a-Service businesses that meet the definition of an information service are subject to sales tax.
New Mexico	Yes	5.125%	SaaS is subject to gross receipts tax (GRT) in New Mexico. SaaS products are classified under custom or canned software and computer services.
New York	Yes	4%	SaaS is generally taxable in New York. Exceptions only apply to custom software designed specifically for one customer.
North Carolina	No	n/a	SaaS is not taxable in North Carolina as long as the software is cloud-based and only accessible remotely. However, downloadable software installed on the user’s computer is taxable.
North Dakota	No	n/a	SaaS is not taxable in North Dakota as long as the software is accessed remotely via a subscription and not delivered as tangible personal property.
Ohio	Yes	5.75%	SaaS is classified as a taxable digital service when utilized for businesses. This applies to data processing or electronic information providing software. When individuals utilize SaaS for personal use, they are exempt from sales tax when it falls under the digital service classification.
Oklahoma	No	n/a	SaaS is not taxable since it is classified as an intangible service in Oklahoma.
Oregon	n/a	0%	None. There is no sales tax in Oregon.
Pennsylvania	Yes	6%	SaaS is classified as a taxable digital product or “canned software” in Pennsylvania. Additionally, localities such as Allegheny County and Philadelphia County may apply local sales tax on SaaS, bringing the total sales tax rate to 7% or 8%, depending on the county.
Rhode Island	Yes	7%	All prewritten software, whether vendor-hosted or not, is taxable in Rhode Island.
South Carolina	Yes	6%	SaaS is classified as a taxable communications service in South Carolina.
South Dakota	Yes	4.20%	South Dakota classifies SaaS and digital products as taxable services. Local taxes may also apply.
Tennessee	Yes	7%	SaaS is classified as a taxable “remotely accessed software” (RAS) in Tennessee. Regardless of where the server hosts the software, if users access it in Tennessee, they define it as RAS.
Texas	Yes	6.25%	SaaS is 80% taxable and 20% exempt from sales tax as it is considered part of a data processing service in Texas.
Utah	Yes	4.85%	Regardless of delivery method, SaaS is classified as taxable prewritten (canned) computer software in Utah.
Vermont	Yes	6%	Beginning July 1, 2024, SaaS is now taxable in Vermont under Act 183 (H.887). Sales tax applies to SaaS regardless of delivery and accessibility method.
Virginia	No	n/a	SaaS is classified as a non-taxable service in Virginia.
Washington	Yes	6.50%	SaaS is classified as a taxable retail sale of digital service or prewritten software in Washington.
West Virginia	Yes	6%	Regardless of delivery and accessibility method, SaaS is considered a taxable service in West Virginia. However, the sales of qualified data processing services are non-taxable.
Wisconsin	No	n/a	SaaS is generally not taxable in Wisconsin. However, SaaS bundled with the transfer of tangible personal property is taxable.
Wyoming	No	n/a	SaaS is generally not taxable in Wyoming as long as the software is delivered electronically and accessed remotely. Sales tax only applies to software downloaded and installed via tangible media.

NOTE: SaaS is also taxable at the rate of 6% in the District of Columbia or Washington, D.C. By October 2026, Washington, D.C. plans to increase this rate to 7%.

Keep in mind that these rules are also subject to change at any time.

States Without SaaS Sales Tax

There are 45 states with statewide sales tax in the US, but only 24 states do not impose sales tax on SaaS as of 2026. Those states are:

Alabama
Arkansas
California
Colorado
Florida
Georgia
Idaho
Illinois
Indiana
Kansas
Maine
Michigan
Minnesota
Mississippi
Missouri
Nebraska
Nevada
New Jersey
North Carolina
North Dakota
Oklahoma
Virginia
Wisconsin
Wyoming

Aside from these 24 states, there are 5 states without sales tax in the US, also known as the NOMAD states. Those states are Alaska, Delaware, Montana, New Hampshire, and Oregon.

While Alaska does not have a statewide sales tax, local sales tax may still apply to SaaS products depending on the jurisdiction.

Why States Tax SaaS Differently

Different states tax Software-as-a-Service differently due to a variety of reasons. However, the primary factor is due to each state’s varying sales tax rules. Each state acts independently, revising its sales tax regulations periodically.

Why States are Expanding Their Sales Tax Coverage on SaaS Taxability in 2026

As mentioned in the prior section, states revise their regulations once in a while. This means that as of 2026, more states may eventually begin expanding their sales tax coverage on SaaS.

With the growing popularity of SaaS and ecommerce businesses, states need to adapt and ensure they don’t miss out on potential sales tax revenue. Therefore, the taxability of SaaS across states is subject to change at any time.

For example, in Kentucky, SaaS was exempt from sales tax until January 1, 2023.

What to Do if SaaS is Taxable?

In case you encounter a situation like Kentucky, states usually offer reasonable exceptions for businesses to adjust to new taxability rules. But if SaaS becomes taxable in a state where you operate, managing your business’s sales tax compliance is the first step to avoid penalties.

Sales Tax Compliance for SaaS

To help your SaaS business stay compliant across states, here are 7 essential SaaS compliance tips to keep in mind:

Determine the taxability – As previously mentioned, SaaS is classified differently across states. Depending on your business model, your product may or may not be taxable in a state. Check each state’s definition thoroughly.
Know your nexus – Before collecting sales tax on SaaS, check first whether you have a sales tax nexus in a state or not. You may either have a physical or economic nexus.
Maintain records – Proactively manage your transaction records and keep track of all your sales. This helps reduce future audit risks.
Track customer location and details – Understanding where your customers are located and whether they are purchasing for personal or business use is important to identify your SaaS tax liabilities across states.
Be mindful of local taxabilities – For example, in Colorado, SaaS is not taxable at the state-level. However, local home rules across Colorado jurisdictions may apply sales tax on SaaS.
Stay updated with changing rules – Sales tax rules are always subject to change, which includes the taxability of SaaS products across states. Keep up with the latest updates on sales tax rules by:
- Visiting state websites to check for new regulations
- Bookmark this blog and revisit whenever you’re in doubt
- Follow or subscribe to accounts that share updates for free (Find TaxHero on LinkedIn, X, or Facebook)
Utilize automated software – Use SaaS to solve your SaaS sales tax problems. For example, TaxHero is a SaaS business that specializes in managing sales tax. Sales tax software for ecommerce businesses offers automated services that can easily identify your liabilities and nexus in a state.
You can also take advantage of how some states offer discounted or full sales tax exemption on B2B SaaS transactions.

TaxHero helps your SaaS business stay compliant.

Complying with SaaS sales tax laws and regulations can be complex and time-consuming. TaxHero experts can simplify this job by handling all the compliance requirements. Our CEO can help walk you through our full-stack, all-inclusive sales tax services.

Frequently Asked Questions

1. What is the tax on SaaS products?+

Generally, in the US, the tax on SaaS products depends on the state’s sales tax rates. Depending on the state, SaaS products could either be taxable or non-taxable.

2. What does SaaS sales mean?+

SaaS sales generally refer to companies selling computer software that customers access remotely. This means that cloud-based or subscription-based software are examples of SaaS sales.

3. Is SaaS subject to sales tax in CO?+

Currently, as of March 2026, SaaS is not subject to sales tax at the state-level in Colorado. However, local home rules may apply sales tax to SaaS.

4. Who is the biggest SaaS company?+

The biggest SaaS company in recent years is Apple, closely followed by Microsoft and Google. Other big SaaS companies are Oracle, SAP, Salesforce, Palantir, IBM, ServiceNow, and Adobe.

5. Is SaaS sales B2B?+

SaaS sales can be both B2B (business-to-business) and B2C (business-to-consumer). Depending on the SaaS product, users can utilize it for either personal or commercial usage. For example, in some states, like Connecticut, Iowa, and Ohio, they impose sales tax on SaaS based on its usage.

The Ultimate Guide on SaaS Sales Tax

Key Takeaways