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Is SaaS taxable?

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Last Updated

Is SaaS taxable?

Anrok | Streamlined sales tax for SaaS

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.”

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Anrok | Streamlined sales tax for SaaS
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There are complicating factors

With a category of products as boundary-breaking as SaaS, some states are not able or willing to simply stick SaaS into a particular category and call it a day. Authorities often feel the need to make various distinctions and must also consider the implications of remote access on how to enact the tax. These considerations lead to the following complicating factors.

  • Exclusions: Some states’ tax laws have exclusions or other stipulations that result in SaaS products being taxed inconsistently based on their function. In Massachusetts, for instance, SaaS is subject to tax unless the service is used solely for remote storage of a customer’s data. Nebraska, which typically doesn’t tax SaaS, has published guidance suggesting that certain security-focused SaaS offerings may be taxable under the category of “security services.”
  • SaaS vs. streaming: There are also complications in how states differentiate among various types of digital services and products. States particularly struggle with having a consistent approach to all digital products, with some taxable and others not, often without clear distinctions. For example, New York considers SaaS a taxable product but does not tax streaming video services like Hulu and Netflix. However, the state does tax streaming gaming services, making for a complicated tax landscape, especially since some streaming companies offer both videos and games.
  • Buyer, seller, and server locations: Along with the difficulty of distinguishing what tax category SaaS fits into, states that tax SaaS must also account for how remote access affects taxation. SaaS products being used remotely means that there are three locations involved in the transaction: the seller’s location, the buyer’s location, and the location of the server that hosts the software. The state must define which of these locations matter in the determination of tax. Pennsylvania, for example, states that tax is only due if the SaaS user is in the state, regardless of where the server is. That means that out-of-state SaaS users do not owe sales tax even if the server is in Pennsylvania.

Learn more with our guide to SaaS taxability

The complicated tax landscape for SaaS products in the U.S. is enough to make one’s head spin. While an automated tax management solution like Anrok can help you ensure that you’re following all the appropriate laws, no matter how confusing, it is still an excellent idea to brush up on the details of SaaS taxation across states. Download our guide to understand more about sales tax in 5 key states.

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