Sales Tax Fundamentals
Get up to speed on the basics of sales tax
Last updated June 2022
Software as a service (SaaS) is a model where software is hosted in one place but licensed by subscription for use by customers. TaxJar, for example, is a SaaS-based business.
Like SaaS, sales tax can also be tricky, especially when you’re trying to figure out when and where your services are liable to sales tax.
Knowing that SaaS businesses have to protect their bottom line as well as reputation, the risk of being noncompliant is not an option. But just like many other “new” technologies, most states haven’t quite wrapped their hands around whether or not SaaS is taxable in their state.
For example, some states consider SaaS a service. So, if services are generally taxable in the state – such as in Arizona – then SaaS is considered taxable. In most states, where services aren’t taxable, SaaS also isn’t taxable. Other states, like Washington, consider SaaS to be an example of tangible software and thus taxable. Just like with anything tax related, each state has made their own rules and laws.
This list compiles all SaaS-related state sales tax laws at the time of this writing.
Important note: You’ll notice that some of the sources listed here are based on letter rulings. Letter rulings are interpretations of existing law made by states when the law doesn’t specifically cover an issue. As more states wise up to “new” business models like SaaS, the more likely they are to eventually amend their laws to expressly cover transaction types. So keep in mind that whether or not SaaS is taxable is subject to change. If you run into any states who handle SaaS taxability differently than we’ve indicated on this list, please leave a comment or contact us!
The TaxJar API Handles SaaS Taxability
If you’re a SaaS provider and all this has your head spinning, don’t worry. The TaxJar API allows you to assign a product tax code to the products you sell. Find product tax codes here. When you assign this product tax code to the SaaS services you sell, the TaxJar API automatically charges your customer in any state the right amount of sales tax depending on that state’s applicable SaaS sales tax laws. Ready to stop guessing that you’re charging the right rates and automate sales tax? To learn more about TaxJar and get started, visit TaxJar.com/how-it-works.
In Which States Should You Charge Sales Tax on SaaS Subscriptions?
Note: Some of the source links take you to long pages filled with state laws and legalese. If this is the case, search for “computer,” “computing,” or “software” to find the pertinent part of the state code.
Arkansas – SaaS is non-taxable in Arkansas. Both software delivered electronically is not considered taxable, and “the use of prewritten computer software in providing software programming services does not cause the programming services to become taxable unless tangible personal property is provided to the customer.” (Source)
Indiana – SaaS is considered non-taxable in Indiana. A letter ruling from November 2016 said, “Cloud computing fees, remote storage fees, and data transfer fees were not subject to Indiana sales tax because the fees were paid for services and not for tangible personal property, specified digital products, prewritten computer software, or telecommunication services.” (Source)
Kentucky – SaaS is non-taxable because it isn’t tangible personal property. (SaaS is not explicitly covered in Kentucky code, so this was confirmed with a call to the Kentucky Department of Revenue. Always be extra cautious when choosing not to charge sales tax based on unofficial guidance. Click here for contact information for the Kentucky Department of Revenue Division of Sales & Use Tax.)
North Dakota – SaaS is non-taxable in North Dakota.
If you need to charge sales tax on a SaaS product in your online store, the TaxJar API takes all of these state laws into account and makes your job simple.
To learn more about how sales tax affects your SaaS business and guide you through the steps to compliance, here’s a checklist specifically created for SaaS businesses to help you understand the complexities around SaaS sales tax. To learn more about TaxJar and get started automating your sales tax compliance, visit TaxJar.com/industry/saas.