As the Software as a Service (SaaS) industry continues to grow, so do the complexities surrounding sales tax regulations. Understanding your obligations is crucial for SaaS businesses operating in the United States. In this guide, we’ll explore the states that charge sales tax on SaaS, why these regulations exist, and how you can navigate them effectively.
An Introduction to Sales Tax for SaaS
Sales tax is a consumption tax imposed by state and local governments on the sale of goods and certain services. While traditional tangible goods have always been subject to sales tax, the taxation of digital products, including SaaS, is a relatively new development.You are obligated to pay sales tax in states where you have nexus and where SaaS is considered taxable.
- Physical nexus: You have a shop, warehouse, postal address or another form of physical presence in the state. This includes people working for the business, like 1099 contractors or any payrolled employees.
- Economic nexus: Your sales to customers in the state reach the threshold specified by the authorities.
Why There Are Only 22 States that Charge Sales Tax on SaaS
At the time of writing, only 22 states have specific laws in place that require SaaS providers to collect and remit sales tax. The reasons for this limited scope vary, but generally, it’s due to differences in state tax laws and interpretations of what constitutes a taxable service.
Which States Charge Sales Tax On SaaS?
The following states currently charge sales tax on at least some SaaS products, either locally or at the state level:
- Alabama
- Hawaii
- Kentucky
- New Mexico
- South Dakota
- Wisconsin
- Arkansas
- Idaho
- Louisiana
- North Dakota
- Tennessee
- Wyoming
- Iowa
- Minnesota
- Ohio
- Utah
- Connecticut
- Kansas
- Mississippi
- Pennsylvania
- Washington
- D.C.
SaaS Taxability by State – Visual Map
SaaS Tax Rates by State
SaaS tax rates vary by state and even within different local jurisdictions. It's essential to know the tax rates for the states in which you operate to ensure accurate tax collection and remittance.
The Rules for B2C vs. B2C
In some states, the taxability of Software as a Service (SaaS) depends on whether it is used for business-to-business (B2B) or business-to-consumer (B2C) transactions. States can impose different tax treatments based on the nature of the use. B2B transactions sometimes qualify for exemptions or lower rates because governments want to encourage a business-friendly environment. B2C transactions are often taxed more heavily as they represent end-user consumption.
“Calculate your SaaS tax separately in every state where you have nexus, as the rates vary. And make sure your product is classed accurately!” – Gareth Kobrin, Global Tax Specialist
What's the difference between SaaS and a digital product?
SaaS provides software applications over the internet, accessible through a web browser, typically on a subscription basis. The SaaS provider handles hosting, maintenance, and updates, allowing users to access and use the software remotely. A digital product is usually a one-time purchase or download, such as an e-book, music file, or software application, which the user installs and uses locally on their own device. SaaS and digital products are taxed differently in many states. Make sure you define your product correctly to avoid getting caught out.
How to Calculate Your SaaS Sales Tax Rate
To calculate your SaaS sales tax rate, you'll need to consider the following factors:
- The state and local tax rates applicable to your customers' locations
- Whether the state taxes SaaS at the state level, local level, or both
- Any applicable exemptions or special rules for SaaS in each jurisdiction
When You Need Help From a Specialist
Navigating SaaS sales tax can be complex, especially when dealing with multiple states and varying tax rates. If you're unsure about your sales tax obligations or need help calculating your tax rates, it's essential to seek assistance from a sales tax expert.
Automate Your SaaS Sales Tax Calculations
To streamline the sales tax filing process and ensure compliance, many SaaS businesses choose to automate their sales tax filings. Sales tax automation software can calculate the correct tax rates, generate and file accurate sales tax returns, and even remit payments on your behalf. Contact us today for automated SaaS sales tax compliance and turn your attention to the things that matter to you and your business. We offer a free consultation so you can understand your tax obligations and figure out what support you need. Got questions? Email us at hello@yondatax.com