Last updated January 27, 2017
Software as a service (SaaS) is a model where software is hosted in one place but licensed, by subscription, for use by customers. TaxJar, for example, is a SaaS-based business.
Like with many other “new” technologies, most states haven’t quite wrapped their hands around whether or not SaaS is taxable in the state.
For example, some states consider SaaS a service. So if services are generally taxable in the state – such as in Arizona – then SaaS is considered taxable. In most states, where services aren’t taxable, SaaS also isn’t taxable. Other states, like Washington, consider SaaS to be tangible software and thus taxable. Just like with anything tax related, each state has made their own rules and laws.
This list compiles all SaaS-related state sales tax laws at the time of this writing.
Important note: You’ll notice that many of the sources listed here are based on letter rulings. Letter rulings are interpretations of existing law made by states when the law doesn’t specifically cover an issue. As more states wise up to new business models like SaaS, the more likely they are to eventually amend their laws to expressly cover transaction types. So keep in mind that whether or not SaaS is taxable is subject to change. If you run into any states who handle SaaS taxability differently than we’ve indicated on this list, please leave a comment or contact us!
TaxJar’s SmartCalcs Sales Tax API Handles SaaS Taxability
If you’re a SaaS provider and all this has your head spinning, don’t worry. TaxJar’s SmartCalcs Sales Tax API allows you to assign a product tax code to the products you sell. If you assign the product tax code for software as a service (which is 30070) to the digital products you sell, SmartCalcs automatically charges your customer in any state the right amount of sales tax depending on that state’s applicable laws.
In Which States Should You Charge Sales Tax on SaaS Subscriptions?
Note: Some of the source links link to long pages filled with state laws and legalese. If this is the case, search for “computer,” “computing,” or “software” to find the pertinent part of the state code.
Alabama – SaaS is considered a non-taxable service as long as the purchaser doesn’t download or possess the software code, but only accesses the software that is hosted by a 3rd party or seller’s servers. (SaaS is not explicitly covered in Alabama code, so this was confirmed with a call to the Alabama Department of Revenue. Always be extra cautious when choosing not to charge sales tax based on unofficial guidance. Click here to request a specific letter ruling from the Alabama Department of Revenue.)
Arkansas – SaaS is tax exempt in Arkansas. Both software delivered electronically is not considered taxable, and “the use of prewritten computer software in providing software programming services does not cause the programming services to become taxable unless tangible personal property is provided to the customer.” (Source)
Indiana – SaaS is taxable in Indiana. (Source) However, be sure to reference the letter of the law. A letter ruling from November 2016 said, “Cloud computing fees, remote storage fees, and data transfer fees were not subject to Indiana sales tax because the fees were paid for services and not for tangible personal property, specified digital products, prewritten computer software, or telecommunication services.” (Source)
Kentucky – SaaS is tax exempt because it isn’t tangible personal property. (SaaS is not explicitly covered in Kentucky code, so this was confirmed with a call to the Kentucky Department of Revenue. Always be extra cautious when choosing not to charge sales tax based on unofficial guidance. Click here for contact information for the Kentucky Department of Revenue Division of Sales & Use Tax.)
Maine – SaaS is tax exempt if the software isn’t downloaded. ((SaaS is not explicitly covered in Maine code, so this was confirmed with a call to Maine Revenue Services. Always be extra cautious when choosing not to charge sales tax based on unofficial guidance. Click here for information on how to get a letter ruling from Maine Revenue Services.)
If you need to charge sales tax on a SaaS product in your online store, TaxJar’s SmartCalcs sales tax API takes all of these state laws into account and makes you job simple.
Do you have questions or something to say about the taxability of digital products? Start the conversation in the comments!