Is software as a service (SaaS) "tangible personal property"? Can you charge sales tax on it? Each state has a different definition of what SaaS is and whether it’s taxable.
Not charging SaaS sales tax where you need to can lead to hefty penalties and audits that can harm your business.
States breathe easy when a person or company buys a software program on a tangible disc or flash drive. The item sold is clearly tangible personal property and will generally be subject to sales tax.
However, things get tricky regarding Software as a Service (SaaS). With SaaS, customers access their software online, generally via subscription, and if they stop paying, they no longer get access to the software.
This post delves into each state’s rules and laws on SaaS. We’ve included sources so that you can investigate for yourself.
What is SaaS sales tax?
Some states see SaaS as tangible personal property because it is an electronic version of prewritten computer software that could be sold via disk or other tangible means.
Other states view SaaS as a service that is either taxable or non-taxable, depending on the state.
What to look out for is that some states tax SaaS, which is accessed remotely, differently than downloaded software that lives on a user’s computer or server.
Zamp Tip
When determining whether or not to charge sales tax on your SaaS product, look closely at how the state defines SaaS (or even if they do define it).
SaaS sales tax by usage
Maryland considers SaaS for personal use to be taxable, but SaaS for business use to be non-taxable. In Connecticut, however, SaaS for business use is taxed at a lower rate than SaaS for personal use.
SaaS taxability can blend old and new sales tax laws
In Mississippi, SaaS is only taxed if the server where the app is hosted is located in-state. This is a callback to a time before South Dakota v. Wayfair when a business had to have some sort of physical presence in a state before being required to collect sales tax in that state.
Which states charge sales tax on SaaS?
The chart below summarizes the taxability of SaaS in each state based on a state’s publication or law.
As always, keep in mind that each state defines SaaS differently, and these laws are changing rapidly. We recommend speaking with a SaLT expert about your specific SaaS taxability obligations.
Yes. SaaS is sold at the general rate when sold to an individual user, and it is taxable at a reduced rate when sold for use in an enterprise computer system.
It’s no secret that dealing with sales taxes in different states can be confusing, especially for SaaS businesses that must file in states who haven’t clearly decided how to tax SaaS. Each state has different tax regulations and requirements when it comes to sales tax obligations.
If you’re looking for a fully automated sales tax solution, book a call with Zamp! Our solution provides rooftop accurate sales tax rates and calculations, product mapping, nexus monitoring, and more, so you never have to worry about being compliant. Plus, Zamp was recently recognized by G2 for having Best Meets Requirements, Easiest Setup, Easiest to Use, and Best Support.
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