The Ultimate Guide on SaaS Sales Tax

Cloud-based services and Software-as-a-Service (SaaS) businesses have become more popular worldwide. According to Statista, the global SaaS market is projected to be worth $197 billion by the end of 2023. The increasing popularity of this business model comes with sales tax implications too.

Software-as-a-Service providers often need help finding out whether their services are taxable or not in their operating state. Vendors must stay on top of sales tax laws to avoid legal consequences and penalties.

This blog addresses the questions about SaaS taxability and provides a state-by-state guide about the sales tax regulations for SaaS-based businesses.

 

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. While 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.

 

Do all States Charge Sales Tax on Software-as-a-Service?

No, not all states charge sales tax on SaaS.

Besides the states with no sales tax, some other states wholly or partially exempt SaaS products from sales tax. This situation can be confusing and complicate navigating SaaS services’ sales tax compliance requirements. Understanding SaaS regulations ensures you meet your sales tax obligations appropriately.

 

Which States Charge Sales Tax on SaaS?

Before operating a SaaS business in any state, you must determine if your state charges sales tax.

Here is a state-by-state guide about SaaS taxability.

STATE IS SAAS TAXABLE? SALES TAX RATE SPECIFICATIONS Alabama Yes 4% All sales of software, including SaaS, are taxable. Alaska Yes up to 7.50% local sales tax While SaaS products are not subject to a statewide sales tax in Alaska, they are taxed in many home rule charters in the state. Arizona Yes 5.60% Software delivery electronically on a subscription basis is considered tangible personal property. Arkansas No n/a Software delivered electronically is considered non-tangible and non-taxable. California No n/a Only if the possession or control of the software is transferred to the user/customer it is considered taxable. Colorado No n/a Generally, Software-as-a-Service is exempt from sales tax. Connecticut Yes 6.35% If SaaS is used for personal use, then taxed at the full state sales tax rate. If SaaS is used for business, then it is only taxed at the rate of 1%. Delaware Not applicable 0% None. There is no sales tax in this state Florida No n/a Cloud computing services and the sale of software electronically are not subject to Florida sales tax  Georgia No n/a Electronic delivery of software is not considered tangible personal property. Hawaii Yes 4% It does not have a sales tax, but the general excise tax applies to certain goods and services, including SaaS. Idaho No n/a Since the user has no permanent right to use the software, it is not defined as a taxable service. Illinois No n/a Generally, Software-as-a-Service is exempt from sales tax. Indiana No n/a Exempted if the customer has no ownership or control over the software or server. Iowa Yes 6% Taxable if for personal use. If for business use, then SaaS is exempt. Kansas No n/a SaaS services are not taxed as long as their ownership is not transferred to the users and they access the software remotely. Kentucky Yes 6% SaaS services performed before January 1, 2023, are exempt. Louisiana No n/a Currently, the state has no provisions relating to SaaS. Generally, computer-related services, such as repairs and support, are tax-exempt. Canned software is taxable. Maine No n/a Prewritten and electronically delivered software are subject to sales tax, but SaaS services are exempt. Maryland Yes 6% SaaS intended for business use is exempt from sales tax. Massachusetts Yes 6.25% The tax is applied on the use of the software, irrespective of the transfer of ownership Michigan No n/a As long as the software is accessed electronically only, it is not taxable. Minnesota No n/a If the seller owns the application, SaaS services are not taxable. Mississippi No n/a SaaS services are not taxable as long as the software is stored on a server located outside the state. Missouri No n/a The service provider is taxed for tangible personal property used to provide the service purchased or used in this state. Montana Not applicable 0% None. There is no sales tax in this state Nebraska No n/a Computer software is taxable, but SaaS services are not defined as computer software. Nevada No n/a Electronically delivered software is not considered tangible personal property. New Hampshire Not applicable 0% None. There is no sales tax in this state New Jersey No n/a Software is not taxed 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 4.875% Custom and canned software and computer services are taxable. New York Yes 4% Access to computing power is non-taxable in the state. North Carolina No n/a Since the software is not downloaded on the user’s computer, it is not taxed. North Dakota No n/a Computer software is taxed when transferred and does not require a subscription. Ohio Yes 5.75% Tax-exempt when SaaS is employed for personal use. Oklahoma No n/a SaaS is not defined as a taxable service.  Oregon Not applicable 0% None. There is no sales tax in this state Pennsylvania Yes 6% Computer software is taxable if the user is located within the state. Rhode Island Yes 7% All prewritten software, whether vendor-hosted or not, is subject to SaaS sales tax. South Carolina Yes 6% Software-as-a-Service is considered a communications service and, therefore, subject to sales tax South Dakota Yes 4.50% Electronically delivered software is considered tangible personal property. Tennessee Yes 7% SaaS is subject to sales and uses tax, irrespective of a customer’s method of use. Texas Yes 6.25% SaaS is 80% taxable and 20% exempt from sales tax as they are considered part of a data processing service. Utah Yes 4.85% License fees for remotely accessed software and cloud computing applications are taxable. Vermont No n/a Prewritten and downloadable software are considered taxable Virginia No n/a SaaS transactions and maintenance services are exempt from sales and use tax. Washington Yes 6.50% All types of software are taxable in the state. West Virginia Yes 6% The sales of qualified data processing services are non-taxable. Wisconsin No n/a The services are exempt from sales tax if the vendor owns and possesses the software. Wyoming No n/a The services are non-taxable as long as the user doesn’t get any tangible personal property (such as a disk drive).

SaaS is taxable in the District of Columbia as all custom and prewritten software are taxed.

If SaaS services are taxable in your state, you must collect sales tax on SaaS subscriptions from your customers. You must have a Private Letter Ruling for specific guidance about SaaS taxability in your state to get the proper compliance guidance for your business.  

TaxHero helps your SaaS business stays compliant.

Complying with SaaS sales tax laws and regulations can be a 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.