Guide to SaaS sales taxes by state and internationally

Software that is delivered as a service, and accessed over the internet on a subscription basis, is known as Software as a Service (SaaS). Adobe Creative Cloud and Microsoft 365 are both examples of SaaS companies.

Because SaaS can be interpreted as either a product or a service, its taxation varies according to how each state classifies it and how their tax laws work. Some states, like Alabama, consider SaaS a service. Services are taxable in Alabama, thus SaaS is taxed. Other states, like Illinois, consider SaaS a service but don’t impose taxes on services. Finally, some other states consider SaaS digital products and thus charge sales tax.

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In this guide, we’ll list the SaaS sales tax rules by state, as well as some other considerations to keep in mind if you run a SaaS business.

Take note that some of the sales tax laws in this list are based on letter rulings. States make these rulings when their existing laws on the matter aren’t precise. These rulings are subject to change as SaaS companies become more commonplace and states decide to update their laws to explicitly mention them.

SaaS sales tax by state

Here’s a list of the sales tax obligations for SaaS products and services by state:

Alabama: SaaS is subject to sales tax in Alabama. Computer software is considered a tangible personal property in the state.

Alaska: SaaS is taxable in Alaska​​.

Arizona: SaaS is taxable in Arizona​​.

Arkansas: SaaS isn't subject to sales tax in Arkansas, where software delivered electronically isn't taxable.

California: SaaS isn't subject to sales tax in California​​ because it’s not considered tangible personal property.

Colorado: SaaS isn't subject to sales tax in Colorado​​ because it’s not considered tangible.

Connecticut: SaaS is subject to sales tax in Connecticut​​. SaaS for personal use is fully taxed at 6.35%, while SaaS for business use is only taxed at 1%.

Delaware: Saas isn’t taxable in Delaware, since the state doesn’t have any sales tax.

Florida: SaaS isn't subject to sales tax in Florida​​.

Georgia: SaaS isn't subject to sales tax in Georgia, since it’s neither considered a taxable service nor a tangible product.

Hawaii: SaaS and other cloud-based services are subject to sales tax in Hawaii.

Illinois: SaaS isn't subject to sales tax in Illinois.

Indiana: SaaS isn't subject to sales tax in Indiana. In 2016, a ruling decided that SaaS is considered a service rather than tangible personal property or digital products.

Iowa: SaaS is subject to sales tax in Iowa unless it is used for business purposes.

Kansas: SaaS isn't subject to sales tax in Kansas. In Kansas, Software as a Service (SaaS) businesses are called "Application Service Providers" (ASPs).

Kentucky: SaaS is subject to sales tax in Kentucky as of January 1, 2023.

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Louisiana: SaaS is subject to sales tax in Louisiana.

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Maine: SaaS isn’t subject to sales tax in Maine.

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Maryland: SaaS is subject to sales tax in Maryland unless it is used for business purposes.

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Massachusetts: SaaS is subject to sales tax in Massachusetts.

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Michigan: SaaS isn't subject to sales tax in Michigan unless it includes downloadable components.

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Minnesota: SaaS isn’t subject to sales tax in Minnesota.

Mississippi: SaaS isn't subject to sales tax in Mississippi.

Missouri: SaaS isn't subject to sales tax in Missouri.

Nebraska: SaaS isn't subject to sales tax in Nebraska.

Nevada: SaaS isn't subject to sales tax in Nevada.

New Jersey: SaaS isn’t subject to sales tax in New Jersey.

New Mexico: SaaS is subject to sales tax in New Mexico.

New York: SaaS is subject to sales tax in New York.

North Carolina: SaaS isn't subject to sales tax in North Carolina.

North Dakota: SaaS isn’t subject to sales tax in North Dakota.

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Ohio: SaaS is subject to sales tax in Ohio unless it is used for business purposes.

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Oklahoma: SaaS isn’t subject to sales tax in Oklahoma.

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Pennsylvania: SaaS is subject to sales tax in Pennsylvania.

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Rhode Island: SaaS is subject to sales tax in Rhode Island.
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‍South Carolina: SaaS is subject to sales tax and additional fees in South Carolina.

South Dakota: SaaS is subject to sales tax and additional fees in South Dakota.

Tennessee: SaaS is subject to sales tax in Tennessee.

Texas: SaaS is 80% taxable and 20% exempt in Texas.

Utah: SaaS is subject to sales tax in Utah.

Vermont: SaaS isn't subject to sales tax in Vermont.

Virginia: SaaS isn't subject to sales tax in Virginia.

Washington: SaaS is subject to sales tax in Washington since it is considered software, which is taxable.

Washington D.C.: SaaS is subject to sales tax in Washington D.C..

West Virginia: SaaS is subject to sales tax in West Virginia.

Wisconsin: SaaS isn’t subject to sales tax in Wisconsin.

Wyoming: SaaS isn’t subject to sales tax in Wyoming, since customers don't own the software product by purchasing it.

International sales tax on SaaS

If you own a SaaS business in the United States that only sells its products domestically, you’re somewhat in luck. That’s because the unique U.S. tax code makes it possible for many states not to charge taxes on prewritten computer software.

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But if you sell your services around the world, it’s important that you take an international approach to tax management.

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That’s because most countries around the world see SaaS as a taxable service. Even if your business is in Oregon, a state that doesn’t impose sales tax at all, if you do business with consumers in Europe, the U.K., Japan, China, Canada, and most other countries around the world, you’ll be required to pay taxes on your revenue.

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International sales taxes are often significantly higher than domestic sales taxes. Some countries charge 20% or more for sales tax on SaaS services.  For that reason, it’s important to stay up to date on your tax liabilities around the world.

5 important SaaS sales tax rules you need to know

The more you know about SaaS sales taxes, the better equipped you are to keep your business in compliance with the rules and avoid troublesome penalties. There are several rules in the tax code, and your accountant should be able to help you navigate those rules. The most important rules you need to know are explained below.

1. Rules around the economic nexus threshold

The term “nexus” is a legal term that’s used to describe events that give states legal jurisdiction over you and your business. For example, a physical nexus is a physical activity in a state, like opening a storefront, that gives the state the ability to tax your company’s earnings.

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Economic nexus thresholds place an economic limit to the economic activities companies can take part in within a state before facing tax obligations to that state.

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Before 2018, the economic nexus threshold only applied to corporate income taxes. However, in 2018, Wayfair challenged regulators and won a Supreme Court decision that applied the economic nexus threshold to state sales taxes across the United States.

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Today, you must complete one of the following events for an outside state to have jurisdiction over your business in terms of sales tax:

1. Dollar-value economic nexus threshold. Your business must earn at least $100,000 in revenue in the state to fall under state sales tax jurisdiction.
2. Transaction economic nexus threshold. Your business must complete a minimum of 200 transactions in the state to fall under state sales tax jurisdiction.

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Keep in mind that these economic nexus thresholds are either or. If you earn more than $100,000 in revenue in a state in any given year with under 200 transactions, you’re still required to follow that state’s tax regulations. Moreover, if you perform more than 200 transactions in any given year with a total value of less than $100,000, you’ll need to pay your taxes to that state anyway.

2. Penalties for noncompliance

The government is the world’s largest and most powerful collections agency. At some point, you’ll end up paying your taxes or facing stiff penalties. When it comes to sales tax compliance, those penalties happen quickly.

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Sales tax payments are typically due quarterly, and you’ll pay dearly if those payments are late.

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Although penalties vary from state to state, most states start with a 10% penalty that’s imposed once the tax payment is 30 days late. At 60 days late, most states impose a 20% penalty. That penalty continues to grow at a rate of 10% per month to a maximum penalty of 50%.

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So, if you don’t pay your sales taxes on time, you could end up paying 150% of your total tax bill.

3. Registration is typically required

If your business is in a state that charges sales tax for SaaS transactions, or you reach an economic nexus in another state that allows them to impose sales taxes, you’re typically required to register your company with the state’s Department of Revenue.

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Registration is usually easy and inexpensive, but it’s an absolute must in order to do business in these states.

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Each state has its own rules and regulations, but in most states, if you do business that creates sales tax events and don’t register with the Department of Revenue, you’re committing a crime. For example, in Florida, failure to register with the Department of Revenue is a first-degree misdemeanor punishable by up to one year in jail and fines of up to $1,000. Moreover, you’ll still be required to pay taxes plus a penalty of 6% per annum on all back taxes due.  

4. Tax-compliant receipts and documentation

If your company ever gets audited, it’s important to have the documentation you need to hand to the tax authorities handy. One key set of documents is tax-compliant receipts. Every time you make a sale, it’s important to produce a receipt for that sale that shows the following:

• Sale amount
• Taxes collected
• State or country of the buyer’s residence

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You also need to keep track of the amount of money you’re paying in sales tax every time you make a payment, whether or not your business created any nexus events, and if so, records of tax payments in those jurisdictions.

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Keep in mind that tax audits typically go back three years. So, you’ll want to keep all documents on file for at least that time period.

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The bottom line here is that good record-keeping is crucial in any business. SaaS businesses are no different.

5. International taxes

You don’t have to worry about international taxes if your SaaS business only operates in the United States. On the other hand, if you do business with customers in any other country, it’s important to pay close attention to international tax implications.

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Keep in mind that in most other countries, SaaS services are just as taxable as any other product or service. Some of the most popular countries include:

• Europe. Taxes on SaaS services in Europe vary from one European country to the next, but they all charge a sales or use tax. Tax rates may be as high as 20% or more.
• Japan. You’ll pay a sales tax rate of around 10% on SaaS sales in Japan.
• United Kingdom. The United Kingdom charges a 20% sales tax on all e-commerce sales, including SaaS services.
• Canada. Sales tax rates on digital goods in Canada vary by province. Nonetheless, you’ll typically need to pay between 5% and 13% of sales.
• China. China’s sales taxes on SaaS services vary by region but usually range between 10% and 15%.

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Keep in mind that these taxes are levied on top of any tariffs the company charges for doing business with United States providers. So, it’s important to consider all financial liabilities a country poses to your company before you decide to do business in that country.  

Which SaaS services are and aren’t taxable

From an international standpoint, most countries don’t have rules for which SaaS services are and are ’t taxable. Essentially, if you offer software as a service, you’ll need to pay your taxes on sales.

The same goes for most U.S. states.

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Most states that charge SaaS service sales taxes require those taxes to be paid regardless of the service. However, there are some states that charge different tax rates for personal use SaaS and for business use SaaS.

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Nonetheless, if you offer SaaS out of a state that charges sales tax, chances are you’ll have to pay the tax. The same goes if you’re offering SaaS services at a large scale to consumers in states that charge sales tax on these services, even if your home state doesn’t.

Tips for managing and simplifying SaaS sales tax

Managing SaaS sales taxes can be a headache if you do it all manually. To make it easier, here are some tips for simplifying your accounting:

• Take advantage of quality accounting software. Thanks to technological innovation, there’s a software solution for just about anything these days. Accounting is no different. A quality piece of accounting software can help you manage taxes on a state-by-state and country-by-country basis so you’re not left doing all the calculations by hand.
• Keep your paperwork in order. The biggest problem most businesses face in an audit situation is simply not being ready for that audit. Good record-keeping processes can solve that problem. Always keep records of sales, tax payments, expenses, and all other information the tax authorities will be looking for if you get audited.
• Stay on top of tax regulations. The United States tax code changes every year, as is the case in most states and other countries around the world. Stay up to date with your state’s SaaS taxability to make sure you incorporate any changes as they happen.
• Hire a professional. If your business has grown to the point where it seems impossible to handle your accounting duties on your own, it’s time to bring a professional in so you can focus on more important things.

Streamline your business taxes with automated expense management

In order to make filing your business taxes as simple and accurate as possible, tax preparation should happen year-round. Automated expense management tools can help.

Expense automation prepares you for tax season by:

• Organizing your business expenses with searchability features for easy access.

• Automatically sorting your business expenses by category, department, or employee.
• Staying current with your tax paperwork in order to avoid any hassle during the tax period.

R‍amp’s corporate cards with built-in expense management software help keep your tax documents in order year-round, without the hassle of manual processes.

Learn more about how Ramp can simplify your taxes and expense management.