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Is Software as a Service Taxable?

September 27, 2022

Is Software as a Service (SaaS) taxable? The short answer to this common question: Maybe. Each state treats taxation of SaaS slightly differently, although many states do consider it taxable. Even if a state doesn’t require sales tax on SaaS, the company may still need to file if they pass a certain threshold of sales.

SaaS really encompasses three types of services: SaaS; Infrastructure as a Service (IAAS) and Platform as a Service (PAAS). Each of these can be treated differently, but SaaS alone can be taxable in many states. And the states may follow suit on the other services.

State Tax Considerations for SaaS Companies

For tax purposes, the definition of SaaS may differ from state to state. Some consider SaaS a service, while others treat it as tangible personal property. Certain states may consider it a data processing service or an information service. Some states do not address the taxability of SaaS and companies are left to decide for themselves. Many states don’t require a company to collect tax if all they provide is nontaxable services. How a state may define SaaS could determine if a company is required to file a sales tax return in a particular state, regardless of if SaaS is actually taxable by law within that given state. Once a company passes the economic threshold for sales, they may have to file in that state, even if no sales tax is owed. Failing to file can lead to heavy penalties and interest fees.

Does My State Tax SaaS?

While there is a lot of confusion in some states, there are many states that are very clear on the taxability of SaaS. Those states that clearly tax SaaS are listed below. Laws are always changing, but the following states currently, as of 9/1/22, have laws in place that at least partially tax SaaS.

Arizona
Connecticut
District of Columbia
Hawaii
Iowa
Louisiana (1/1/2023)
Massachusetts
Maryland
Minnesota
Mississippi
New Mexico
New York
Ohio
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Washington
West Virginia

*The states that were not listed have laws in place that explicitly do not tax the sale of SaaS or they currently have no specific guidelines issued on the matter.

It’s important to stay in compliance with the changing laws regarding Software as a Service. If you need help in staying in compliance with a state, please contact an Anders advisor below for more information on state laws or to learn more about  Anders State and Local Tax services.

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