Sales Tax on SaaS
Key takeaways:
- Software as a Service (SaaS) is a modern software distribution model typically purchased via subscription.
- The taxability of SaaS in the United States can vary depending on a few factors, including the state it’s purchased and whether it’s for business or personal use.
- Laws related to the taxability of SaaS (and the taxability of e-commerce in general) can change each year, as states regularly update their sales tax laws – this article is accurate as of the publish date, and will be updated as necessary.
- If you operate a SaaS business and are wondering if you should be adding state and local taxes to your pricing — it is critical to stay up to date on the latest rulings from tax authorities in each state.
What is SaaS?
SaaS is the commonly used acronym for Software as a Service. It’s a software distribution model that usually requires a subscription to use. Prominent examples of cloud-based software companies using a SaaS model include Salesforce and Quickbooks.
Is SaaS taxable if you sell to customers in the United States?
It depends – and knowing whether or not you should charge sales tax is the key to sales tax compliance for your SaaS business.
The taxability of your SaaS product varies depending on the jurisdiction, including which state it’s purchased in, and if it’s used for business or personal use. It’s further complicated by the fact that while some state laws do not currently have sales tax rules for SaaS, they might in the future. As the economy digitizes, tax authorities globally are taxing digital products and digital goods more — tax code and tax regulations are rarely static. SaaS is no exception.
Which states require companies to pay SaaS sales tax? What are your company’s sales tax obligations?
We’ve listed each US state below, along with whether or not they apply sales or use tax to SaaS (and if they do, if it’s for business use, personal use, or both), links to the state’s Department of Revenue if applicable, and the appropriate sales tax rate.
Note that the qualification of business versus personal use can be complex and varies widely. For example, only SaaS purchased for commercial purposes for “an enterprise computer system”, which includes operating programs or applications for the exclusive use of the business customer, is nontaxable in Maryland. Therefore, you should consult a tax expert if you have questions about your sales tax obligations.
Alabama
SaaS is taxable in Alabama for business and personal use.
Alaska
SaaS is taxable in Alaska for business and personal use. Even though there are no state rules on taxability, as it’s determined separately by each jurisdiction, buying SaaS is considered a sale of property or provision of service, and is generally taxed at the standard rate.
Arkansas
SaaS is not taxable in Arkansas.
Arizona
SaaS is taxable in Arizona for business and personal use.
California
SaaS is not taxable in California.
Colorado
SaaS is not taxable in Colorado.
Connecticut
SaaS is taxable in Connecticut. SaaS for business use is taxed at 1%, and at the standard rate for personal use.
District of Columbia (DC)
SaaS is taxable in DC for business and personal use.
Delaware
SaaS is not taxable in Delaware, as there is no state sales tax.
Florida
SaaS is not taxable in Florida.
Georgia
SaaS is not taxable in Georgia.
Hawaii
SaaS is taxable in Hawaii for business and personal use.
Idaho
Illinois
SaaS is not taxable in Illinois.
Indiana
SaaS is not taxable in Indiana.
Iowa
SaaS is taxable in Iowa for personal use, but not taxable for business use.
Kansas
SaaS is not taxable in Kansas.
Kentucky
SaaS is taxable in Kentucky for business and personal use.
Louisiana
SaaS is taxable in Louisiana for business and personal use.
Maine
Maryland
SaaS is taxable in Maryland for personal use, but not taxable for business use.
Massachusetts
SaaS is taxable in Massachusetts for business and personal use.
Michigan
SaaS is not taxable in Michigan.
Minnesota
SaaS is not taxable in Minnesota.
Mississippi
SaaS is not taxable in Mississippi.
Missouri
SaaS is not taxable in Missouri.
Montana
SaaS is not taxable in Montana, as there is no state sales tax.
Nebraska
SaaS is taxable in Nebraska for business and personal use.
Nevada
SaaS is not taxable in Nevada.
New Hampshire
SaaS is not taxable in New Hampshire, as there is no state sales tax.
New Jersey
SaaS is not taxable in New Jersey.
New Mexico
SaaS is taxable in New Mexico for business and personal use.
New York
SaaS is taxable in New York for business and personal use.
North Carolina
SaaS is not taxable in North Carolina.
North Dakota
SaaS is not taxable in North Dakota.
Ohio
SaaS is taxable in Ohio for business use, but not taxable for personal use.
Oklahoma
SaaS is not taxable in Oklahoma.
Oregon
SaaS is not taxable in Oregon, as there is no state sales tax.
Pennsylvania
SaaS is taxable in Pennsylvania for business and personal use.
Puerto Rico
SaaS is taxable in Puerto Rico for business and personal use.
Rhode Island
SaaS is taxable in Rhode Island for business and personal use.
South Carolina
SaaS is taxable in South Carolina for business and personal use.
South Dakota
SaaS is taxable in South Dakota for business and personal use.
Tennessee
SaaS is taxable in Tennessee for business and personal use.
Texas
SaaS is taxable in Texas for business and personal use, and is taxed at 1%.
Utah
SaaS is taxable in Utah for business and personal use.
Vermont
SaaS is taxable in Vermont for business and personal use.
Virginia
SaaS is not taxable in Virginia.
Washington
SaaS is taxable in Washington for business and personal use.
West Virginia
SaaS is taxable in West Virginia for business and personal use.
Wisconsin
SaaS is not taxable in Wisconsin.
Wyoming
SaaS is not taxable in Wyoming.
How Fonoa can help
Fonoa is a global tax automation and compliance solution provider that helps SaaS companies automate their tax processes in a digital, borderless economy. Our easy-to-integrate solution automatically keeps track of changing rates and rules to help your business stay compliant.
Get in touch to find out more.
