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Sales Tax by State: Is SaaS Taxable?

by Jennifer Dunn

SaaS Subscriptions Taxable

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.

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 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)

California – SaaS is tax exempt in California since there is no transfer of tangible personal property. (Source)

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

Illinois – SaaS is considered a tax exempt 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 tax exempt because it’s delivered electronically. (Source)

Kansas – SaaS is tax exempt. In Kansas, SaaS providers are referred to as “Application Service Providers” (ASPs). (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.)

Louisiana – SaaS is tax exempt as of May 2011. (Source)

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.)

Maryland – SaaS is tax exempt, 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 tax exempt in Michigan. (Source)

Minnesota – SaaS is taxable in Minnesota. (Source)

Mississippi – SaaS is tax exempt in Mississippi. (Source – starts on p. 50)

Missouri – SaaS is tax exempt in Missouri. (Source)

Nebraska – SaaS is tax exempt in Nebraska. (Source)

Nevada – SaaS is tax exempt in Nevada. (Source)

New Jersey – SaaS is tax exempt 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 tax exempt in North Carolina. (Source)

North Dakota – SaaS is tax exempt 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 tax exempt in Oklahoma. (Source)

Pennsylvania – SaaS is taxable in Pennsylvania. (Source)

Rhode Island – SaaS is tax exempt 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 tax exempt in Vermont as of July 1, 2015. (Source)

Virginia – SaaS is tax exempt 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 tax exempt in Wisconsin. (Source)

Wyoming – SaaS is tax exempt 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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