If you’re a producer of software, it’s essential to know how tax authorities in states across the country will classify your products. Software is a particularly complex category in tax law, in part because it’s a relatively new type of product and continues to evolve in ways that tax departments have difficulty keeping up with.
One example of such evolution is the creation of Software as a Service, known widely as SaaS, which is software that customers access remotely via the internet and pay for on a subscription basis. However, it can be difficult to make the distinction between what is SaaS and other types of software. Read on to learn the biggest differences between them.
Primary differences between SaaS and traditional software
- Location and accessibility: If your software is SaaS, then anyone, anywhere with a connection to the Internet can access it. This means that multiple organizations can access the software hosted on the same network at the same time. By contrast, on-prem software is hosted on hardware physically accessible to the customer and only available on devices that have access to that local network.
- Licensing and payment methods: Another major difference between SaaS and traditional software is the way that people purchase it. SaaS is a subscription-based service; customers pay a service fee for access to that software. Meanwhile, traditional/on-prem software is typically purchased up-front through a licensing agreement.
- Ownership: The provider of SaaS software remains the owner of all hardware and software and is also responsible for maintaining and updating the software over time. With SaaS, the customer owns only their own data in the system. With on-prem software, on the other hand, the customer owns all aspects of the solution: hardware, software, and data. All maintenance and updates are also the responsibility of the customer.
