Product Taxability Sales Tax 101 Sales Tax Rates

Sales Tax by State: Is SaaS Taxable?

by Jennifer Dunn

Software as a service taxability

Last updated April 14, 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.

Find out more about SmartCalcs here and sign up for a 30-day free trial. Or try for yourself with our SmartCalcs sales tax API demo!

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.)

Arizona – SaaS is taxable in Arizona. (Source: Arizona Letter Ruling LR04-010)

Arkansas – SaaS is non-taxable 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)

California – SaaS is non-taxable in California since there is no transfer of tangible personal property. (Source)

Colorado – SaaS is non-taxable in Colorado because it is not delivered in a tangible medium. (Source)

Connecticut – SaaS is taxable in Connecticut, but only at the “data processing” rate of 1%. (Source)

Florida – SaaS is non-taxable in Florida when it is only a service transaction and is not accompanied by the transfer of tangible personal property. (Source)

Georgia – SaaS is considered non-taxable in Georgia, because is not one of the services enumerated as taxable and is not available in tangible media. (Source

Hawaii – SaaS (and computer services) is taxable in Hawaii. Hawaii’s general excise tax applies to every good and service not tax exempt. (Source)

Idaho – SaaS is non-taxable in Idaho. Remotely accessed computer software is not taxable, and digital subscriptions are not taxable. (Source – Rule 27)

Illinois – SaaS is considered a non-taxable service. (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)

Iowa – SaaS is non-taxable because it’s delivered electronically. (Source)

Kansas – SaaS is non-taxable. In Kansas, SaaS providers are referred to as “Application Service Providers” (ASPs). (Source

Kentucky – SaaS is non-taxable 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.)

Louisiana – SaaS is considered non-taxable as of May 2011. (Source)

Maine – SaaS is non-taxable 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.)

Maryland – SaaS is non-taxable, because it is not expressly numbered among the services that create sales tax nexus in the state. (Source)

Massachusetts – SaaS is taxable in Massachusetts. (Source)

Michigan – SaaS is non-taxable in Michigan. (Source)

Minnesota – SaaS is non-taxable in Minnesota. (Source)

Mississippi – SaaS is non-taxable in Mississippi. (Source – starts on p. 50)

Missouri – SaaS is non-taxable in Missouri. (Source)

Nebraska – SaaS isn on-taxable in Nebraska. (Source)

Nevada – SaaS is non-taxable in Nevada. (Source)

New Jersey – SaaS is non-taxable in New Jersey. (Source)

New Mexico – SaaS is taxable in New Mexico. (Source)

New York – SaaS is taxable in New York. (Source)

North Carolina – SaaS is non-taxable in North Carolina. (Source)

North Dakota – SaaS is non-taxable in North Dakota. (Source)

Ohio – SaaS is taxable, with the exception of when it is incidental to the true purpose of the sale. (I.e. Generally business SaaS software would be taxable.) (Source)

Oklahoma – SaaS is non-taxable in Oklahoma. (Source)

Pennsylvania – SaaS is taxable in Pennsylvania. (Source)

Rhode Island – SaaS is non-taxable in Rhode Island (provided no pre-written software is downloaded). (Source)

South Carolina – SaaS is considered a taxable service in South Carolina, as are other charges to access a website. (Source)

South Dakota – SaaS is considered a taxable service in South Dakota, as are other charges to access software. (Source)

Tennessee – SaaS is taxable in Tennessee. (Source)

Texas – SaaS is considered part of a data processing service and thus taxable in Texas. (Source)

Utah – SaaS is taxable in Utah. (Source)

Vermont – SaaS is non-taxable in Vermont as of July 1, 2015. (Source)

Virginia – SaaS is non-taxable in Virginia. (Source)

Washington – SaaS is taxable in Washington since all software, delivered by whatever means, is considered taxable in the state. (Source)

Washington D.C. – SaaS is considered a taxable service in Washington D.C. (Source)

West Virginia – SaaS is considered a taxable service in West Virginia. (Source

Wisconsin – SaaS is non-taxable in Wisconsin. (Source)

Wyoming – SaaS is non-taxable in Wyoming, since the purchaser does not have permanent use of the product. (Source)

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.

Try a 30-day free trial of the SmartCalcs sales tax API

Do you have questions or something to say about the taxability of digital products? Start the conversation in the comments!

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