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Is SaaS Taxable? How Sales Tax Applies to Software Services

Software as a Service (commonly called SaaS) has become an increasingly popular model for delivering software applications over the internet. Since Salesforce launched their first customer relationship management (CRM) platform in 1999, SaaS has seen tremendous growth, with a market size valued at $237.48 billion in 2022 and a projected reach of $908.21 billion by 2030.

With all its benefits, the taxation of SaaS at the state level is complex. As is common in sales tax, states take different approaches on whether and how to tax SaaS. Some states tax SaaS as a service, others treat it as taxable software or digital goods, while some exempt it entirely. Determining when and where SaaS is taxable requires a detailed examination of each state’s laws.

This article provides an in-depth look at the taxability of SaaS across all 50 states. We cover the key criteria states use to determine is SaaS is taxable, an overview of each state’s laws on SaaS taxation, strategies to minimize SaaS tax liability, and the ongoing evolution of SaaS taxation. Understanding this complex patchwork of these tax rules is crucial for both SaaS providers and customers.

What is SaaS?

SaaS stands for Software as a Service. It is a software distribution model in which a third-party provider hosts applications and makes them available to customers over the internet. Rather than purchasing expensive software licenses or installing hefty software on computers or servers, customers can subscribe to an SaaS application to save money, manpower, and hard-drive or memory space.

Some key characteristics of SaaS include:

  • Hosted in the cloud – SaaS applications are hosted in the cloud by the SaaS provider. Customers access the software over the internet, without needing to install anything on the server.
  • Pay-as-you-go pricing – Rather than purchasing software licenses upfront, SaaS customers pay a subscription fee (typically monthly or yearly) to use the software.
  • Scalability – SaaS providers manage the underlying infrastructure, enabling the application to scale easily as a business grows.
  • Accessible from anywhere – Since SaaS applications are cloud-based, customers can access them from any internet-connected device.

Popular SaaS Examples

Common examples of SaaS applications include customer relationship management (CRM) software, email services, office productivity suites, accounting software, and more. To make the model of SaaS easier to understand, here are some of the most popular providers:

  • Salesforce – The original, Salesforce is a customer relationship management (CRM) software, designed to blend sales, marketing, commerce, services and IT into one team to effectively manage business and customer relations.
  • Adobe – Specifically Adobe Creative Cloud, Adobe provides cloud-based design, web development, video editing, and other creative programs like the popular Photoshop. Customers can build individual app subscriptions or subscribe to the Creative Cloud All Apps plan.
  • Zoom – A boon during the COVID-19 pandemic, Zoom is a videoconferencing platform. With a multitude of applications to choose from, like Team Chat and conversational AI, Zoom is used worldwide by both companies and families.
  • Intuit – Unless you’ve been living under the proverbial tax rock, you’ve probably heard of TurboTax and QuickBooks. Overall, Intuit is a global financial technology platform, offering financial management solutions for both businesses and individuals.

Why States Tax SaaS Differently

The taxability of software and digital goods like SaaS is still a complex and evolving issue. Unlike physical goods which are clearly taxed by most states, digital goods and services are less uniformly defined.

Some key reasons why states have different rules when it comes to taxing SaaS and other digital goods:

  • SaaS blurs the line between a tangible product and an intangible service. Some states view SaaS as a taxable digital product or “canned” software, as it is meant to be sold and distributed. Others see it as a non-taxable service with no tangibility with which to tax.
  • Technology has advanced faster than tax laws. Most state tax codes were written before cloud computing and SaaS became mainstream, and many of these codes have been slow to update in accordance with the digital economy.
  • It’s complex for companies to implement digital tax policy. Factors like sourcing sales transactions and integrating with various billing systems creates implementation barriers.
  • Each state has different tax bases and incentives. Some states rely more heavily on sales tax revenue than others, influencing their eagerness to tax digital goods. States also compete to attract tech business and wish to avoid appearing unfriendly to the industry.

All these examples only touch the surface of inconsistent taxation of SaaS and other digital goods.

SaaS Taxation Criteria

Whether or not a state taxes SaaS depends on several key factors and criteria:

  • Residency – If the SaaS customer resides in the state, some states consider this sufficient reason to tax subscription costs and purchases of SaaS use.
  • Taxability Matrixes – A taxability matrix is the documents and codes written in each state that defines the nuances of that state’s sales tax. Some states have incredibly specific taxability matrixes, while others use vague language like “may be taxable” or “depends”. Taxability matrixes change over time, adopting to new technology and consumerism.
  • Type of SaaS – The specific type of SaaS matters. Typically, SaaS is only accessed online or via the cloud. For this reason, many states won’t tax SaaS because there is no exchange of tangible personal property, (which is something that can be felt, seen, or touched), and ownership of the service does not shift from the seller to the purchaser.
  • Business or Personal Use – Some states will only tax SaaS if it is purchased for business use and exempt personal use purchases, or vice versa.
  • Nexus – If an SaaS provider has offices, employees or property in a state, they have physical presence and therefore nexus in that state. This nexus will require sales tax to be collected in a SaaS-taxable state. On the other side, an SaaS provider can also create economic nexus in a state outside of their own if they exceed certain thresholds (or sales) in that state. Learn more about how nexus applies to out-of-state sellers here.

Understanding these basic criteria allows SaaS providers to better evaluate the risk of taxation within different states. Consulting the state’s taxability matrix is just the starting point. The nature of the SaaS and specific customer situations ultimately determine taxability in some U.S. locations. Ultimately, it is best to reach out to the state for a Private Letter Ruling.

SaaS by State

StateIs SaaS Taxable?RatesDocumentationSpecifications
AlabamaYesSaaS is subject to the state rate of 4% and local tax rates.Code 80-6-1-.37Taxability includes the sale or lease of SaaS.
AlaskaYesAlaska does not impose state sales tax, but local municipalities can tax SaaS.Taxation of Digital Goods and ServicesThe purchase and subscription costs of SaaS are considered taxable in some local areas.
ArizonaYesSaaS is subject to the state rate of 5.6% and local Arizona Transaction Privilege Tax (TPT).Taxpayer Information RulingArizona doesn’t have clear statutory on SaaS taxability. The most recent publication is in 2010, wherein it is determined that leasing and licensing SaaS is subject to tax.
*Arizona does specify that software specifically designed for the use of only one person or business is exempt.
ArkansasNoNo state or local rates apply to SaaS.Arkansas Tax RulesComputer software like SaaS that is delivered electronically is not subject to Arkansas gross receipts tax.
CaliforniaNoNo state or local rates apply.Sales and Use Tax Law CodeCalifornia only deems tangible personal property (i.e. property that can be felt and touched) taxable. Software that is transferred or accessed electronically is not considered tangible personal property, and is therefore nontaxable.
ColoradoNoNo state or local rates apply.Sales & Use Tax Topics: Computer SoftwareComputer software (like SaaS) is not subject ot sales tax in Colorado if it is provided through an application service provider, delivered to the customer electronically, or transferred to the customer by load and leave (manually loaded by the vendor).
ConnecticutYesSaas is taxable at the state rate of 6.35% for consumers, and taxed at a reduced rate of 1% for businesses.Sales and Use Taxes on Digital Goods and Canned or Prewritten SoftwareConnecticut changed their taxability matrix to include digital goods like SaaS on October 1, 2019. However, sales of computer software for business use are taxed at a reduced rate.
District of ColumbiaYesSoftware and digital goods are taxed at the 6% state rate.Taxation of Digital Goods in the District of ColumbiaThe sale of canned software like SaaS is considered a data processing service in the District of Columbia, which is taxable at the state rate. This includes sales, rentals, and maintenance.
DelawareNoDelaware doesn’t have a traditional sales tax and does not tax sales of software.There is no statewide sales tax in Delaware, so SaaS also isn’t taxed.
FloridaNoNo state or local rates apply to SaaS.Sales and Use Tax – Computer SoftwareAny sale of electronically delivered software or digital service is not subject to tax in Florida.
GeorgiaNoNo state or local rates apply to SaaS.Georgia Letter Ruling SUT – Computers & SoftwareComputer software that is delivered electronically is not a sale of tangible personal property and is not subject to sales and use tax. When these sales happen, the invoice or other documentation must prove that the software was delivered electronically, or the Georgia Department of Revenue will assume it was a tangible delivery and therefore taxable.
HawaiiYesHawaii’s General Excise tax rate of 4% applies to SaaS, as well as city and county rates. Tax Information Release No. 2021-06Hawaii considers the sale of prewritten or canned software (SaaS) to be a sales of tangible personal property, even when transferred electronically or sold as a license.
IdahoNoNo state or local rates apply to SaaS.Idaho Sales and Use Tax Administrative RulesCanned software (like Saas) that is sold and delivered electronically or via the load and leave method is not taxable in Idaho. This also includes digital subscriptions. If any tangible medium is involved in delivery, the sale becomes taxable.
IllinoisNo (except for Chicago)The City of Chicago (which is a separate tax agency in Illinois) taxes SaaS at 9%.Illinois: Administrative Code – Computer Software
City of Chicago: Personal Property Lease Transaction Tax Ruling
Computer software that is provided through a cloud-based delivery system (which SaaS is) is not subject to tax in Illinois. However, Chicago considers all computer software, regardless of delivery method or licensing, to be taxable.
IndianaNoNo state or local rates apply. Sales Tax Information BulletinPrewritten computer software (like SaaS) that is remotely accessed via the cloud or internet is not considered taxable.
IowaYes (for individual or noncommercial use).SaaS is taxable at the state rate of 6%. Local rates also apply.Taxation of Specified Digital Products, Software, and Related ServicesAfter January 1, 2019, Iowa changed their laws to tax prewritten computer software, regardless of delivery method. However, the state also instituted a “commercial enterprises exemption”, which makes prewritten computer software nontaxable for businesses and manufacturers, insurance companies, financial institutions, and other related professions and occupations.
KansasNoNo state or local rates apply. Opinion Letter No.
While Kansas does tax a lot of computer software and services, it considers SaaS as an application service provider (ASP), and ASP charges are not taxable.
KentuckyNoNo state or local rates apply.Kentucky Sales Tax FactsKentucky taxes prewritten software and software licenses, but not software that is accessed exclusively via the cloud or online.
LouisianaNoNo state or local rates apply.Revenue No 10-001 RepealLouisiana initially taxed all types of software transactions in 2010, but swiftly repealed the revenue ruling only months later. To date, it has not be reinstated.
MaineNoNo state or local rates apply.2020 Sales and Use Tax Law Reference GuideMaine typically taxes all types of computer software and services, with a specific caveat. If the subscriber is only able to access the application online and doesn’t download it, the sale isn’t taxable.
MarylandNo (if purchased for commercial use).Subject to the state rate of 6%.Business Tax Tip #29If SaaS is purchased for commercial use and is used in an enterprise computer system (i.e. an enterprise server, or the cloud) it is not considered taxable. However, SaaS purchases for individual use are taxed.
MassachusettsYesSubject to the state rate of 6.25%.Revenue Regulation Fact Sheet: Computer Industry Services and ProductsAlthough some of the definitions and laws can enter a gray area, SaaS and cloud-computer software is generally taxable in Massachusetts.
MichiganNoNo state or local rates apply.Sales and Use Tax Treatment of Software ProductsSaaS that is only accessed online or via the cloud is not considered tangible personal property in Michigan, and is not taxable. Any software that is downloaded with an application to a computer is taxable.
MinnesotaNoNo state or local rates apply.Computer Software and Digital ProductsOnline hosted software accessed through the internet is not taxable in Minnesota.
MississippiNoNo state or local rates apply.Mississippi Sales and Use TaxSoftware that is maintained on a server located outside of Mississippi and accessible only via the Internet is not taxable.
MissouriNoNo state or local rates apply.Missouri DOR Taxation of SoftwareSales of canned software are taxable in Missouri, but Software as a Service is not. Customized software is not taxable either.
MontanaNoMontana has no state sales tax, and no local rates apply.Montana Department of Revenue Sales Tax InformationWhile Montana doesn’t have a gneral statewide sales tax, some localities charge sales tax on specific items, especially to nonresidents. However, SaaS is not among any taxable products and services.
NebraskaNoNo state or local rates apply.REG-1-088, Computer SoftwareConcrete information on whether or not SaaS is taxable in Nebraska is slim, but it does not meet the metrics of the type of computer software or services that are taxed in the state.
NevadaNoNo state or local rates apply.Nevada Sales Tax FAQSProducts delivered electronically or by load and leave are not taxable in Nevada, which includes SaaS. For software to be taxable, it has to come in a tangible form, such as a disk.
New HampshireNoNew Hampshire does not have a general state sales tax.New Hampshire Department of Revenue FAQNew Hampshire doesn’t have a general statewide or local sales and use tax, so SaaS is not taxable.
New JerseyNoNo state or local rates apply.New Jersey Cloud Computing TaxabilityNew Jersey only taxes sales of tangible personal property and some services.
New MexicoYesThe state rate of 5% applies, including any additional local rates.NM Code R. Section to New Mexico’s unique sales tax approac – the Gross Receipts tax – most services and sales are taxable in the state, including SaaS and other computer software.
New YorkYesSaaS is subject to the state rate of 4%. Additional local rates may apply.Tax Bulletin ST-128: Computer SoftwareAll sales of computer software are taxable in New York, including remotely accessed software like SaaS.
North CarolinaNoNo state or local rates apply.North Carolina Department of Revenue private letter rulingNorth Carolina doesn’t currently impose sales and use tax on access or subscriptions to cloud-based software. However, other computer software sales are taxable.
North DakotaNoNo state or local rates apply.Guideline – Sales Tax: ComputersNorth Dakota hasn’t yet expressly define SaaS or its taxability. At the moment, it is assumed that SaaS is not taxable.
OhioYesThe state sales tax rate of 5.75% applies to Software as a Service and other computer software. Local rates may also apply.What Services are Taxable?SaaS is taxed as a service in Ohio, regardless of how it is received.
OklahomaNoNo state or local rates apply.Oklahoma Statutes Title 68. Revenue and Taxation – ExemptionsComputer software that is delivered or accessed electronically is not subject to sales tax in Oklahoma.
OregonNoNo rates apply.About Sales Tax in OregonOregon does not have a state sales and use tax.
PennsylvaniaYesThe Pennsylvania sales tax rate of 6% applies to SaaS. Local rates also apply.Pennsylvania Sales and Tax No. SUT-12-001Pennsylvania specifies that cloud computing software and services are subject to sales tax.
Rhode IslandYesSaaS is taxable at the state rate of 7%.ADV 2018-38 For Tax ProfessionalsSoftware available via the Internet, whether downloaded or not, is taxable in Rhode Island.
South CarolinaYesSaaS is taxed at the state rate of 6%. Local rates can also apply. SC Revenue Ruling #12-1Software sold and delivered electronically is not taxable in South Carolina. However, any software accessed via the cloud or through an Application Service Provider (ASP) is taxed.
South DakotaYesSaaS is taxed at the state rate of 4.2%. Additional local rates may apply.Administrative Rules 64:06:02:78Almost all computer services and software are taxable in South Dakota, including SaaS.
TennesseeNoNo state or local rates apply.Tennessee Sales and Use Tax ManualBecause remotely accessed software like SaaS is considered to still be in the possession of the seller, it is not taxable.
TexasYesSaaS is subject to the state rate of 6.25%. Local rates also apply.Texas SaaS Private Letter RulingSaaS is considered a data processing service in Texas, and is therefore taxable.
UtahYesSaaS is subject to the state rate of 4.7%. Local jurisdictions may charge additional rates.Utah Publication 64 – Sales Tax Information for Computer Service ProvidersLicense fees for remotely accessed prewritten software (such as SaaS) are taxable if the purchased software is used in Utah.
VermontNoNo state or local rates apply. Prewritten Software Accessed RemotelySaaS is not considered tangible personal property in Vermont, and is therefore not taxable.
VirginiaNoNo state or local rates apply. Virginia Tax Comissioner Ruling 12-191Any type of service or sale of software that does not involve the exchange of tangible personal property is not taxable in Virginia.
WashingtonYesSaaS is subject to the state rate of 6.5%. Local rates can also apply.Washington State Legislature RCW 82.04.050Sales of software and digital goods, including SaaS, are considered taxable even if the “possession of the software is maintained by the seller or a third party”.
West VirginiaYesSaaS is subject to the state rate of 6%, as well as local rates at 1%.WV Legislature 11-15ASaaS is considered a taxable service in West Virginia.
WisconsinNoNo state or local rates apply.Sales and Use Tax Treatment Computer – Hardware, Software, Services (October 1, 2009 and Thereafter)SaaS is not taxable in Wisconsin as long as the software is located on the vendor’s server, and the customer does not operate, control, or have phsyical access to the vendor’s server.
WyomingNoNo state or local rates apply.2022 Wyoming Statutes Title 3915-101 – DefinitionsWyoming does not tax SaaS as long as no tangible personal property is exchanged.

Minimizing SaaS Tax Liability

Even in states that tax SaaS, there are some strategies and exemptions companies can use to minimize their tax liability.

Reduced Rates

Some states that tax SaaS do so at a reduced rate. For example, if a business in Connecticut purchases SaaS for business use, it is only taxed at a rate of 1%. This is a significant difference from the standard state rate of 6.35%. Other states, like Maryland, omit sales tax on SaaS business purchases entirely. Knowing what states tax SaaS at reduced rates, or omit tax based on personal or business use, can ensure that you do not overcollect.

Server Location

Some states, like Pennsylvania, only tax SaaS if the user is accessing the software from within the state. If the user is accessing the software from out-of-state, it is not taxable, even if the server resides in Pennslyvania. This gray-area of SaaS use can be utilized by sellers to reduce liability, as long as they fully understand the implications and can back up location usage with invoices and receipts.

Partial or Full Exemptions

Similar to reduced rates, Texas takes an 80/20 approach to SaaS taxation. The Lone Star State exempts 20% of SaaS sales from tax, leaving the remaining 80% taxed at state and local rates.

While Texas’ approach is fairly unique, most states exempt certain businesses and organizations from all sales tax collection and charges with the use of exemption certificates. Common exempt organizations include:

  • Religious
  • Charity
  • Government
  • Educational

As long as a valid exemption certificate is shown, sales and purchases to and by exempt organizations are not taxable.

The Future of SaaS Taxation

The taxation of SaaS continues to evolve as states update their rules and definitions around digital products and services. Key things that continue to change the SaaS taxation landscape include:

  • Ongoing policy debates – the taxation of SaaS remains controversial in some states. Policymakers continue to debate the right way to tax SaaS and other digital services, while others are slow to have the discussion. As these debates evolve, changes to taxability matrixes are expected.
  • Possibility of more uniform rules – efforts to create more standardized rules around sales tax have been in the works since the South Dakota v. Wayfair case in 2018. The Multistate Tax Commission adopted a Uniform Sales & Use Tax Resale Certificate that is accepted in 36 states. Another specific effort is the Streamlined Sales and Use Tax Agreement (SSUTA), which tries to simplify sales tax collection across states. Getting states to agree to a uniform sales tax code can be challenging; however, growing pressure for simplicity continues.
  • Court cases – just as South Dakota v. Wayfair changed sales tax across the United States, more court cases and lawsuits may challenge state approaches to sales tax, inclding SaaS.
  • Technological advances – as technology continues to be developed and refined, taxability matrixes will follow suit.

SaaS taxation remains complex, but could see increasing clarity and consistency over time through policy changes, legal pressures, and industry demand.

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Ali Walker

Ali Walker is a writer and overall content creator at Boswick Enterprises, specializing in sales tax education and resources for businesses. Through her work at SalesTaxSolutions.US, Ali strives to cover all aspects of the ever-evolving world of sales tax, providing insights and guidance to business owners.

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