Software-as-a-service (SaaS) is a relatively new addition to the world of commerce, and it’s quite a bit different than goods that have traditionally been bought and sold—and taxed—in the marketplace.
This means that sales tax on SaaS products is a tricky arena. Tax authorities in every state are asking themselves how to approach this hybrid offering. Is SaaS personal property or is it a service? Can it be taxed as both? Or does it need its own category?
As is typical with sales tax rules, each state doesn’t have the same answer, leaving SaaS retailers who sell nationally with a patchwork of diverse laws to contend with.
Laws vary widely across states
States take varying approaches to defining SaaS and digital services, meaning that there’s little consistency from state to state. Here are some of the ways that states define SaaS in the context of sales tax.
- As tangible personal property: Some states, like Pennsylvania, define SaaS offerings as tangible personal property. It can take a lot of negotiation among agencies, officials, and courts to make that determination. The issue has been resolved in Pennsylvania over multiple court cases, the results of which are reflected in a letter ruling that defines SaaS, a.k.a. the act of “accessing taxable canned software on remote servers,” as tangible personal property.
- As a service: Some states define SaaS as a data processing service or some other type of service. If this is the case in a state that generally taxes these types of services, then SaaS will be subject to tax, too. An example is Texas, which classifies SaaS as a data processing service that is taxable under state law. In states that don’t tax any services, like California, defining SaaS as a service means it isn’t taxed.
- As its own category: Some states categorize SaaS as a distinct taxable service offering. For example, Washington defines SaaS as “prewritten computer software, where possession of the software is maintained by the seller or a third party,” and specifies that it doesn’t matter whether the users are charged “on a per use, per user, per license, subscription or some other basis.”