Comprehensive Guide to SaaS Taxability by State in the USA

The understanding of tax regulations in Software as a Service (SaaS) can be a complex subject because the rules are different from state to state. If you fail to comply, it may lead to penalties which might end up costing more for your business.
Ensure your SaaS business is compliant with state tax laws. To help steer through these rules, here's a brief outline that would assist you.

What states don't have sales tax for SaaS?

Somestates do not tax SaaS becausethey do not classify these services as tangible personal property or taxableservicesundertheirsalestaxlaws. They may consider SaaS to be an exempt service or intangible asset that does not fall under the scope of existing tax categories. In addition, these states may make legislation or administrative decisions to specifically exempt digital and cloud-based services such as SaaS from taxation in order to promote the growth of technology and innovation industries within their jurisdictions.

• Arkansas

• California

• Colorado

• Florida

• Georgia

• Idaho

• Illinois

• Iowa (when used for business purposes)

• Indiana

• Kansas

• Maine

• Maryland(when used for business purposes)

• Michigan(unless there is downloadable component)

• Minnesota

• Mississippi

• Missouri

• Nebraska

• Nevada

• New Jersey

• North Carolina

• North Dakota

• Ohio (for personal use)

• Oklahoma

• Virginia

• Wisconsin

• Wyoming

Where is SaaS taxable in the US?

Somestatestax SaaS becausetheyconsider it a taxableserviceundertheirsalesand use taxlaws. These statesmayview SaaS as similar to traditionalsoftwaresales or dataprocessingservicesandthereforefallunderexistingtaxcategories. In addition, taxing SaaS cangeneratesignificantrevenue as companiesbecomemorereliant on these cloud-based services. Thisapproachvarieswidely, reflectingdifferentinterpretations of howdigitalservicesshould be taxed.

• Alabama

• Alaska

• Arizona

• Connecticut (SaaS for personal use is fully taxed, but SaaS for business use is only taxed at the rate of 1%)

• Hawaii

• Iowa (when it is used not for business purposes)

• Kentucky

• Louisiana

• Massachusetts

• New Mexico

• New York

• Ohio (for business use)

• Pennsylvania

• Rhode Island

• South Carolina

• South Dakota

• Tennessee

• Texas (80% taxable and 20% exempt from sales tax)

• Utah

• Vermont

• Washington

• Washington D.C.

• West Virginia

Conclusion

The guide highlights states where SaaS is taxable, non-taxable, or has varied tax rules. Since some states have nuanced regulations, we always recommend to double-check with the provided sources for the most accurate information.