7 Questions SaaS Leaders Should Ask About Sales Tax Compliance

by Jennifer Dunn

Businesses are almost always required to collect sales tax when selling something you can see and touch, like a piece of furniture or jewelry. But things get trickier when the product you are selling is non-tangible technology. And it gets even trickier when you’re selling something that state tax laws haven’t quite caught up with yet, like a SaaS product. 

This post answers the most common questions SaaS leaders ask when it comes to sales tax. 

Am I required to collect sales tax?

This is the primary question SaaS business owners ask, but there’s no simple answer. Whether you are required to collect sales tax from your US customers depends on where and how your SaaS business operates, and your customer’s location. 

Sales tax is governed on the state level, and forty-six states plus DC all have a sales tax. States with a sales tax then set rules and regulations about who is required to collect sales tax. This is called “sales tax nexus” and nexus is generally created when a business has any of the following in a state:

  • A location like an office, retail store, warehouse or even a home office
  • An employee or contractor (again, even working from a home office)
  • Inventory stored in a warehouse for sale
  • Affiliates 
  • Temporary business such as at a tradeshow or craft fair
  • Economic nexus, as in the retailer exceeds a state’s set threshold of sales or transactions 

When your SaaS business has nexus in a state, the next thing to determine is does that state consider the type of SaaS product you sell taxable. 

Is my SaaS product taxable?

This depends on the state’s sales tax laws and how far the state has delved into the taxability of this new (to them) technology. 

First off, in states like Arizona where most services are taxable, SaaS is generally taxable. 

However, after that, things start to get a little tricky. Some states, like Washington, have come out and defined SaaS as tangible software and declared that it is taxable. Other states haven’t really made a determination about SaaS one way or another, which has led sales tax experts to determine that if services are not taxable in that state then SaaS isn’t taxable in that state.

Some other states have released detailed guidance on whether or not SaaS is taxable, but that also gets complicated. For example, some states make a distinction between SaaS products for business use and SaaS products for personal use. Take an accounting software. In Connecticut, if that accounting software is marketed and sold for use in a family’s budgeting, then it’s considered fully taxable. But if that safe software is sold B2B, then it’s only taxed at a 1% rate.

Whether or not SaaS is taxable also depends on how you package and sell your product. In California, SaaS is not considered taxable since there is no transfer of tangible property. However, if your SaaS product comes with a tangible piece of property, such as a flash drive or printed user’s manual, then California could then consider that taxable. 

To sum it up, if your SaaS business has sales tax nexus in a state, and SaaS is taxable in that state, then your SaaS business is likely responsible for collecting sales tax from buyers in that state. 

See a list of states where SaaS is taxable here.

Am I collecting the right sales tax rate? Why must I collect the full billing address from my customers, and not just the zip code?

In eCommerce, even when selling SaaS products, the point of sale is considered to be where the customer takes possession of the product. In SaaS, since no physical product is being sold, the point of sale is generally considered to be the customer’s full billing address. 

This is where it becomes important to understand a little bit about how sales tax is charged. Sales tax is made up of a state rate, then local rates such as county, city and special taxing districts (transportation taxes, science taxes, etc.) This is why a sales tax rate in a city may be higher than a sales tax rate in a surrounded unincorporated area. 

When it comes to collecting sales tax on sales made online, it’s important to know the customer’s exact sales tax rate.  Undercharge, and the state requires that you pay the remainder out of pocket. Overcharge, and the customer may notice and complain, creating a negative experience with your brand.

It can be extremely difficult to know the right amount of sales tax rate to charge from among the United State’s 14,000 different sales tax rates. For example, say a customer enters their address as 1234 Jones Street in Westchestertonville, Iowa. Does that address fall within the city limits? If so, the customer is required to pay the Westchestertonville sales tax rate on top of the state,county and any other local sales tax rates. But if the address falls outside the city limits, then you are not required to charge the city sales tax rate. 

Fortunately, sales tax automation is here to help ensure that you collect the right amount of sales tax every time. Keep reading for how to use the TaxJar API in your SaaS business. 

How much time will it take to report and file sales tax?

The time and employee hours it takes to deal with sales tax depends on a few things:

  • How many states in which you are required to collect sales tax
  • Whether those states require that you break down sales tax collected by jurisdiction (most states do this)
  • How often the state requires that you file (generally monthly, quarterly or annually depending on your business’s sales volume in the state)
  • Whether or not you are using any type of sales tax automation 

For example, without automation, a California sales tax return can take hours simply because it requires sellers to fill out two different forms, determine exactly how much sales tax was collected from customers each taxing jurisdiction, and then round up and reconcile the numbers.

That’s why we invented TaxJar. Scroll down to How can I automate sales tax? below for how to reduce the time it takes to report and file sales tax returns. 

What sales tax changes do I need to be on the lookout for?

As mentioned above, many states have not yet made any kind of determination about whether or not SaaS is taxable. This is because many states’ laws are behind on catching up with how modern businesses and consumers use technology. Some states may be content to remain firm on the platform that “SaaS is a service, and services are not taxable in my state.”  But states are also hungry for money, which they use to fund budget items like schools, roads and public safety, and many of them make new laws to capture new income  streams, such as SaaS. While we don’t recommend using the TaxJar blog as your only source, we do keep track of law changes here on the TaxJar blog.

Another thing SaaS business owners need to be on the lookout for is economic nexus. State economic nexus laws generally say that a business has nexus (i.e. obligation to collect sales tax) when their sales into the state surpass a certain dollar amount or a certain number of transactions. In many states, that threshold is $100,000 in sales and/or 200 transactions. But that number is only a guideline. Each state makes their own rules and laws and that threshold can be as high as $500,000 in sales (in California) or as low as ANY sales (in Kansas, though that law is being contested.) 

It’s important to keep an eye on both your sales amount and your number of sales into a state to determine if you have economic nexus there. For example, if you bill customers monthly, it only takes 17 customers in a state to trigger a state’s 200 transaction threshold. 

If you are a TaxJar user, we’ll keep track of your economic nexus and, for those on TaxJar Professional plans and above, we’ll notify you when you are nearing, or have already met, a state’s economic nexus threshold. That way you can be sure to set up sales tax collection as soon as you have sales tax nexus in a new state and avoid paying sales tax due out of pocket.

How can I automate sales tax?

This is where TaxJar’s end to end sales tax automation comes in. 

TaxJar’s Economic Nexus Insights integrate with your sales channels and let you know if you have economic nexus in a state. 

When collecting sales tax on your SaaS product, the TaxJar API ensures that you collect the right amount of sales tax from every buyer, every time. Sales tax rates change regularly, and the API keeps track so that you don’t have to manually adjust when a sales tax rate rises or falls. Further, our rooftop level calculation means that you collect the correct amount even in tricky situations where it is unclear where an address lands between two sales tax jurisdictions. 

When it comes to easily reporting and filing sales tax, TaxJar has your back there, too. TaxJar integrates with the platforms on which you sell and then turns your sales data into reports just the way the states want to see them. California is not the only state with multiple forms and odd requirements, but TaxJar Reports translate your sales data into the format that states want to see. 

TaxJar AutoFile will then automatically file your sales tax returns and pay the amount owed to the state directly from your bank account. Where before you or your employees had to spend hours slicing and dicing your sales data down to specific transaction-level detail, TaxJar makes sales tax filing quick and painless. 

TaxJar is also there for your ongoing sales tax compliance needs. TaxJar’s Economic Nexus Insights integrate with your sales channels and let you know if you have economic nexus in a state. 

Ready to automate sales tax? To learn more about TaxJar and get started, visit

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