SaaS

Is Software as a Service (SaaS) taxable in California?

by Jennifer Dunn

While it may feel like we’ve been using SaaS products forever, state tax laws tend to lag behind modern technology. That’s why some states consider SaaS taxable, some don’t, and some have never even taken a hard look at the taxability of SaaS yet. Further, in the US, sales tax is governed at the state level, which means that if you have a SaaS business, no matter where your HQ is located, you’re required to check SaaS taxability state-by-state.

This post will go over what you need to know about SaaS taxability if you are selling SaaS products to customers in California.

Note: If you’re brand new to sales tax, we recommend checking out our Navigating Sales Tax Compliance eBook. This will walk you through important sales tax guidelines like how sales tax is governed at the state level, sales tax liability varies from business to business, and how rates are determined by your buyer’s location. 

Should your business charge sales tax on SaaS in California?

SaaS businesses are in luck. SaaS is not considered taxable in California when there is no transfer of tangible personal property.

This means that if you simply allow your Californai customers to remotely access your SaaS software then you are not required to register for a sales tax permit and collect California sales tax.

Here’s what California regulation has to say about SaaS taxability:

“The sale or lease of a prewritten program is not a taxable transaction if the program is transferred by remote telecommunications from the seller’s place of business, to or through the purchaser’s computer and the purchaser does not obtain possession of any tangible personal property, such as storage media, in the transaction. Likewise, the sale of a prewritten program is not a taxable transaction if the program is installed by the seller on the customer’s computer except when the seller transfers title to or possession of storage media or the installation of the program is a part of the sale of the computer.”

Keep in mind, though, that if you also offer tangible personal property to your customers along with your SaaS product, then it can become taxable. For instance, if you offer a flash drive or a tangible instruction manual.

How can I learn more about SaaS taxability in California?

It’s not surprising that the home state of Silicon Valley has created a very thorough set of laws, rules and guidelines when it comes to sales tax on SaaS, digital products and other computer services. 

You can read California Regulation 1502 which details very specific different types of computer services and their taxability. 

How to automate sales tax when selling a SaaS product

Sales tax on SaaS is complicated. You need to know where you have nexus, your customers’ exact sales tax jurisdiction, and whether or not the SaaS product you sell is taxable in a state like California. And that’s exactly why we built TaxJar.  

With TaxJar’s Sales Tax API, all you need to do is let us know that you are selling a SaaS product by entering the product tax code that corresponds to your particular product. From there, we ensure that you collect the right amount of sales tax from every customer in every state where you are required to collect sales tax. If SaaS is non-taxable in a state, then your customer will not be charged. 

Not only does TaxJar make sure you collect the right amount of sales tax, we automatically help you stay compliant in states where your business has economic sales tax nexus. On your behalf, we’ll track when your revenue or your number of transactions in a state exceeds that state’s threshold for economic nexus. No more guessing or digging into your books and each state’s individual nexus laws to determine when it’s time to start collecting sales tax.

Ready to automate sales tax? Start your free, 30-day TaxJar trial today.

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