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.