Should you charge sales tax on your SaaS product?

Jul 31, 2023 | Compliance, Sales Tax

The digital economy evolves quickly. Sometimes, it can be a challenge for government entities and taxing authorities to keep up, leading to incomplete or confusing guidance on tax regulations and compliance. This is the challenge currently facing “software as a service” (SaaS) companies.   SaaS is when a software is distributed to customers through a subscription model. The customer pays monthly or yearly for the product. While SaaS isn’t exactly a bleeding edge new subscription model these days, the wheels of state sales tax regulation turn slowly. Each US state makes its own rules and laws when it comes to sales tax. Some states have taken a hard look at SaaS and made a ruling: either yes, SaaS is taxable or no, it isn’t. Other states haven’t released guidance yet, leaving it up to individual SaaS companies to evaluate their offerings and determine whether or not they should charge sales tax to their customers in that state.  A few states even tax SaaS in novel ways. For instance, Maryland and Ohio tax SaaS for business use differently than SaaS for personal use. But Maryland taxes SaaS for personal use while Ohio taxes SaaS for business use. Connecticut taxes SaaS at a reduced rate of 1%, while Texas only taxes 80% of the price of a SaaS transaction.  The good news is that this business challenge does not have to consume your days. Let’s take a closer look at the problem and then dive into how HOST can help ensure you are collecting the right amount of sales tax on your SaaS product.

How can SaaS companies remain sales tax compliant?

With such inconsistent sales tax expectations across state lines, we know it can be overwhelming to consider how your SaaS company will stay compliant. As we’ve seen with other new technologies, individual state laws will likely adapt and change as more and more companies adopt a SaaS pricing model.  At HOST, our sales tax experts provide ongoing management and compliance monitoring. We stay on top of the evolving sales tax landscape, which means your company won’t fall out of compliance if an individual state changes their SaaS taxing laws or registration requirements. We consistently monitor your sales from state-to-state to ensure that you’re not overpaying or underpaying sales tax, scenarios that could open you up to lost profits, unnecessary penalties, or a damaged reputation. The digital services marketplace is changing fast. Our team at HOST has you fully covered so you can focus on helping your business grow and thrive.

SaaS Sales Tax Requirements by US State

Find your state below to learn more about their SaaS sales tax policy. Keep in mind that some states’ definitions of SaaS are very narrow. You’ll want to consult with an expert to ensure that you are collecting sales tax correctly in states where SaaS is taxable. 

State Is SaaS Taxable? More Information
Alabama Yes Alabama Department of Revenue
Alaska Yes, in local areas with a sales tax Alaska Remote Sellers Sales Tax Commission
Arizona Yes Arizona Department of Rev enue
Arkansas No Arkansas Tax Code
California No California Laws, Regulations and Annotations
Colorado No Code of Colorado Regulations
Connecticut Yes, but at a reduced rate of 1% Connecticut HB 7427
Delaware No sales tax
Florida No Florida Technical Assistance Advisement
Georgia No Georgia Letter Ruling
Hawaii Yes, most services in Hawaii are taxable Hawaii General Excise Tax Law
Idaho No Idaho Sales Tax Administrative Rules
Illinois No, though local Chicago taxes do apply Illinois Administrative Code
Indiana No Indiana Department of Revenue
Iowa Yes Iowa Department of Revenue
Kansas No Kansas Department of Revenue
Kentucky Yes Kentucky Revised Statutes
Louisiana No (a previous ruling that SaaS was taxable has been repealed) Louisiana Department of Revenue
Maine No Maine Revised Statutes
Maryland Yes and No. SaaS for “personal use” is taxable. SaaS for “commercial use” is non-taxable Comptroller of Maryland Business Tax Tips #29
Massachusetts Yes
Michigan No Michigan Letter Ruling
Minnesota No Minnesota Department of Revenue
Mississippi No Mississippi Department of Revenue
Missouri No Missouri Department of Revenue
Montana No sales tax
Nebraska No Nebraska Department of Revenue
Nevada No Nevada Revised Statutes
New Hampshire No sales tax
New Jersey No New Jersey Tax Bulletin
New Mexico Yes New Mexico Administrative Code
New York Yes New York Tax Bulletin
North Carolina No State of North Carolina Sales and Use Tax Bulletins
North Dakota No North Dakota Office of the Tax Commissioner
Ohio Yes and No. SaaS is taxable for business use, but non-taxable for personal use Ohio Laws & Administrative Rules
Oklahoma No Oklahoma Code
Oregon No sales tax
Pennsylvania Yes Pennsylvania Department of Revenue
Rhode Island Yes Rhode Island Department of Revenue
South Carolina Yes South Carolina Department of Revenue
South Dakota Yes South Dakota Administrative Rules
Tennessee Yes Tennessee Code
Texas Yes, Texas considers the price of SaaS products 80% taxable and 20% tax exempt Texas Comptroller
Utah Yes Utah State Tax Commission
Vermont No Vermont Department of Taxes
Virginia No Rulings of the Virginia Tax Commissioner
Washington Yes Washington State Legislature
Washington DC Yes DC Office of Tax & Revenue
West Virginia Yes West Virginia Legislature
Wisconsin No Wisconsin Department of Revenue 
Wyoming No Wyoming Statutes