SaaS and Sales Tax: Where Do Companies Have to Collect?

by Sarah Craig

Software as a service (SaaS) is a model where software is licensed by subscription use for customers, but is centrally hosted. TaxJar, for example, is a SaaS-based business.

SaaS and sales tax can be confusing and varies widely from state to state. For example, certain states consider SaaS a service and tax it as such. So, if services are usually 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 an example of tangible software and thus taxable. See how it can get complicated for a SaaS company selling across multiple states?

However, just like other types of businesses, SaaS companies need to protect themselves from risk, so getting sales tax compliant is crucial. 

This post will cover where SaaS companies need to collect sales tax and how to ensure you are collecting the right rate. Let’s get started.

In Which States Should SaaS companies collect sales tax?

This list compiles all SaaS-related state sales tax laws at the time of this writing.

Important note: You’ll notice that some of the sources listed here are based on these things called 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 these types of 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!

Some of the source links take you 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. (Source)
    • Alaska – SaaS is taxable in Alaska. (Source)
    • 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. SaaS for personal use is taxed at the full state rate, but SaaS for business use is only taxed at the 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 it 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 considered non-taxable in Indiana. 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 taxable. Services arising from or related to installing, maintaining, servicing, repairing, operating, upgrading, or enhancing specified digital products are also subject to tax. (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 for personal use is considered taxable as of May 2011. SaaS for business use is considered non-taxable. (Source)
    • Maine – SaaS is considered tangible personal property and is taxable. (Source)
    • Maryland – SaaS for business use is non-taxable, while SaaS for personal use is taxable. 
    • Massachusetts – SaaS is taxable in Massachusetts when used for personal use, and non-taxable when used for business use. (Source)
    • Michigan – SaaS is non-taxable in Michigan. (Source)
    • Minnesota – SaaS is non-taxable in Minnesota. (Source)
    • Mississippi – SaaS is taxable in Mississippi. (Source)
    • Missouri – SaaS is non-taxable in Missouri. (Source)
    • Nebraska – SaaS is non-taxable in Nebraska. (Source)
    • Nevada – SaaS is taxable for business use in Nevada, and non-taxable for personal use 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 taxable for business use in North Dakota, and non-taxable for personal use in North Dakota. 
    • Ohio – SaaS is taxable for business use in Ohio and non-taxable for personal use. (Source)
    • Oklahoma – SaaS is non-taxable in Oklahoma. (Source)
    • Pennsylvania – SaaS is taxable in Pennsylvania. (Source)
    • Rhode Island – SaaS is taxable in Rhode Island. (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)

How do make sure you collect the right amount of sales tax

Determining the right sales tax rate for your SaaS business can be a tedious process because as we’ve just shown, individual states set their own sales tax laws and rates. Sales tax is charged at the point of sale. For SaaS purchases, the point of sales is the customers’ homes, office, or wherever their billing address is located. 

It’s also important to keep in mind that sales tax is not just one rate. It’s made up of multiple rates. You could see a state rate, plus a county rate, plus a city rate, plus a special taxing district. For example, let’s say you were shopping in your home county and purchased a pair of socks. Then you went to a different county and bought that exact same pair of socks. Upon review of your receipt you would probably notice a different sales tax rate on the two purchases. 

Between the individual state laws, multiple and differing rates, it can be difficult to ensure you are charging the right sales tax rate for each customer. Charging too much makes customers unhappy, charging too little will result in you owing the state the difference. That’s where TaxJar can help.

The TaxJar API ensures that you charge the right amount of sales tax from the right customer, every single time. Our API assigns a product tax code to all of your SaaS offerings, across any channel you use to sell — and eliminate headaches when you’re scaling quickly.

Don’t waste time dealing with the complexities of sales tax 

TaxJar is here to help you mitigate sales tax risks and take the daily hassles of sales tax compliance off your plate. To learn more about TaxJar and get started, visit

TaxJar AutoFile gathers your sales tax data from all your sales channels and files your sales tax returns automatically. We’ll even remit what you owe to the state. So you can spend your time on other things, like building your SaaS companies or maybe taking a day off once in a while. 

Other SaaS Resources

And check out why Quimbee trusts TaxJar with their sales tax compliance. 

Start your 30 day free trial of TaxJar. No credit card required.

Cached Query Manual Filing?filterByFormula=OR({State} = "") needs refreshing in 86