SaaS sales tax: State-by-state and international breakdown for 2025

When you buy a software-as-a-service (SaaS) subscription, is it treated as a service at tax time, or is it more like an actual product? Tax laws vary on this question from state to state, which can create confusion.

Understanding these various tax rules is key to ensuring you file your taxes properly, claim all your deductions, and avoid any penalties. In this guide, we’ll explain why SaaS sales tax is so complicated, list the rules state-by-state, and provide tips for simplifying and managing SaaS sales tax.

What is SaaS, and why is it taxed differently?

Software that’s delivered as a service and accessed over the internet on a subscription basis is known as SaaS. Adobe Creative Cloud and Microsoft 365 are both examples of SaaS products.

Generally, for sales tax purposes, there are two types of products and services:

1. Tangible goods: These are actual physical products you can touch, like office supplies, books, or even business meals
2. Intangible services: These are benefits, services, or experiences that you can’t touch, like legal advice, consulting, or financial services

The problem is that SaaS subscriptions fall into a third, more gray area called digital goods. Digital goods are intangible products that you purchase via download, streaming, or the cloud, like digital white papers, online courses, or subscriptions.

So, the key question is: How are SaaS subscriptions categorized? Are they considered products or services for tax purposes? Making things complicated, each state has different rules regarding these categories. Because SaaS can be interpreted as either a product or a service, its taxation varies according to how each state classifies it and the structure of its tax laws.

For example, some states, like Alabama, consider SaaS a taxable service. 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.

Why SaaS sales tax is so complex

Getting a handle on SaaS sales tax rules can be challenging for several reasons:

• Varying state definitions and taxability rules: There’s no single standard for SaaS taxability by state, and so if you do business across multiple states, you need to understand each individual rule
• Economic nexus laws and thresholds: The economic nexus is determined by a company’s financial activity in a state and not whether it has a physical location. Individual thresholds are measured by total revenue or total transactions, and each state sets its own thresholds.
• B2B vs. B2C distinctions: As with all tax laws, this is also different depending on the jurisdiction. But there can be different rules on whether B2B or B2C SaaS tools are taxable. Traditionally, B2C is more likely to be taxed, but B2B software is increasingly becoming taxable, too.
• Rapidly changing regulations: Because the world of SaaS is still relatively new and ever changing, so are the tax regulations surrounding it

SaaS sales tax by state: 2025 breakdown

Since SaaS sales tax rules are quickly changing, be sure to stay updated, either by bringing on an automated tool that will do the work for you or by consulting a tax professional.

Here’s a guide to the 2025 sales tax obligations for SaaS products and services by state:

Alabama: SaaS is subject to sales tax in Alabama. Computer software is considered 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 considered neither a taxable service nor a tangible product.

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

Idaho: SaaS isn't subject to sales tax in Idaho, where digital subscriptions are not taxable.

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

Indiana: SaaS isn't subject to sales tax in Indiana. A 2025 ruling confirmed 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, SaaS businesses are called Application Service Providers (ASPs).

Kentucky: SaaS is subject to sales tax in Kentucky.

Louisiana: SaaS is subject to sales tax in Louisiana.

Maine: SaaS is not subject to sales tax in Maine.

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

Massachusetts: SaaS is subject to sales tax in Massachusetts.

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

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.

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

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

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

New Hampshire: SaaS isn't subject to sales tax in New Hampshire, where there’s no general sales tax on goods.

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.

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

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

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

Pennsylvania: SaaS is subject to sales tax in Pennsylvania.

Rhode Island: SaaS is subject to sales tax in Rhode Island.‍

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’s 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.

Software-as-a-service isn’t sold in a physical box, but some states treat it as a tangible good. Others see it as an intangible service. Here’s why that distinction matters.

Key SaaS sales tax rules and compliance challenges

The more you know about SaaS sales taxes, the better equipped you are to keep your business compliant and avoid penalties. Although there are several rules in the tax code, your accountant should be able to help you navigate them. There are five key rules to keep top of mind:

1. Economic nexus thresholds
2. Penalties for noncompliance
3. Registration requirements
4. Tax-compliant receipts and documentation
5. International considerations

Below, we go into more detail on each:

Economic nexus thresholds

Nexus is a legal term used to describe events that give states legal jurisdiction over you and your business. Economic nexus thresholds place an economic limit on the financial activities companies can engage in within a state before facing tax obligations to that state.

Before 2018, the economic nexus threshold only applied to corporate income taxes. However, in 2018, the Supreme Court made a ruling in the case of South Dakota v. Wayfair, Inc. that applied the economic nexus threshold to state sales taxes across the United States.

Today, you must complete either 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

In other words, if a SaaS company does business across multiple states, the software will be taxable based on each state's individual thresholds. The best way to track the nexus across multiple states is to understand the tax laws in each state, analyze sales data to make sure you’re staying on top of your geos, and leverage technology to streamline the process.

Penalties for non-compliance

When it comes to sales tax compliance, penalties can occur quickly and may take the form of fines, interest, or back taxes. Sales tax payments are typically due quarterly, and you’ll pay dearly if those payments are late.

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%.

Let’s say you didn’t pay the appropriate taxes on your SaaS subscriptions due to a misunderstanding of state regulations. Underpayment of taxes would make you non-compliant, and if you don’t pay your sales taxes on time, you could end up paying 150% of your total tax bill.

Registration requirements

If your physical 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.

Registration is usually easy and inexpensive, but it’s an absolute must to do business in these states. To register, you can use each state’s online portal or the Streamlined Sales Tax Registration System (SSTRS). You will generally need to provide your legal name, business information, including address, a description of your services, and your EIN.

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 ready. 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

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.

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

International considerations

If you do business with customers in any other country, it’s important to pay close attention to international tax implications. Keep in mind that in most other countries, SaaS services are just as taxable as any other product or service, and you’ll likely encounter VAT (Value Added Tax) or GST (Goods and Services Tax) obligations.

The way to think about VAT/GST is in comparison to the U.S. tax system. In the United States, taxes are collected at the final point of sale from the consumer. But with VAT/GST systems, taxes are collected at every step along the way, from production through to the final sale, with the consumer still responsible for the final sum.

International SaaS sales tax: What you need to know

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

That’s because most countries around the world see SaaS as a taxable service. If you do business with consumers in Europe, the UK, Japan, China, Canada, and most other countries around the world, you’ll be required to pay taxes on your revenue.

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.

Here’s a brief breakdown of how different international jurisdictions handle SaaS sales tax:

• 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 10–15%

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

Registration and compliance for selling to international customers

Selling to international customers requires a careful approach to registration and compliance to ensure you’re following the individual rules of each country or jurisdiction. These are some key considerations to be aware of:

• Business and tax registration: You’ll register your business and for VAT/GST in each country where you do business
• Privacy: In the EU, the General Data Protection Regulation (GDPR) governs the collection and protection of consumer data. You should be aware of other similar rules around the world.
• Payment security: It’s crucial to follow international regulations regarding credit card payments and processing

Consult with legal or tax professionals to make sure you’re staying within the letter of the law.

Tools for SaaS sales tax compliance

If it’s not yet crystal clear, SaaS sales tax compliance is tricky. That’s why automation software can be a smart solution. These are five popular options:

1. Automated tax calculation tools: Tools like TaxJar, Avalara, and Stripe Tax help automate tax calculation and compliance for increased accuracy, efficiency, and scalability, and, ultimately, better financial planning
2. Nexus tracking solutions: This includes software platforms that help you monitor where you owe tax by tracking and analyzing your sales across jurisdictions
3. Exemption certificate management: Exemption certificates verify that purchases are exempt from sales tax for specific reasons. When you manage certificates properly, you can ensure compliance and streamline tax obligations.
4. Return filing and remittance software: These tools help you automate the preparation and filing of tax returns and payments. They help you manage your different obligations across tax jurisdictions in a more organized way.
5. International VAT/GST registrations: These are tools to help solve for non-compliance in the U.S. when selling internationally

So, how do you know which tool is right for your business? Think about the complexity of your financial transactions, where you do business physically and digitally, and the extent of your tax burdens to help choose the right automation software for your needs.

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:

• Stay updated on changing laws: 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.
• Use automation where possible: 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 manually.
• Consult with tax professionals: 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 in a professional so you can focus on more important things.
• Keep thorough records: The biggest problem most businesses face in an audit situation is simply not being prepared. Good recordkeeping processes can solve that. Always keep records of sales, tax payments, expenses, and all the other information tax authorities will be looking for if you get audited.

Most importantly, staying proactive ensures you have the necessary tools to remain compliant and avoid costly tax mistakes.

Streamline your business taxes with automated expense management

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

Ramp’s expense management automation software helps you prepare 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 to avoid hassles during the tax period

With all your data in a unified platform, R‍amp helps keep your tax documents in order year-round without the hassle of manual processes.

Try an interactive demo and learn more about how Ramp can simplify your taxes and expense management.