Which States Require Sales Tax on Software-as-a-Service?

by | Nov 25, 2019

Which States Require Sales Tax on Software-as-a-Service?

Software-as-a-Service (known as SaaS) is a software model in which a customer is given access to a software application that is owned, operated and maintained by a SaaS provider. The customer typically purchases access through a lease or on a subscription basis and accesses the software over the Internet. The software is not transferred to the customer, and the customer is not given the right to download, copy or modify the software in any way. A confusing topic, businesses often want to know which states require sales tax on Software-as-a-Service.  This blog addresses just that. 

Some states treat SaaS similarly to prewritten software purchased and downloaded via the Internet, whereas others see this as a service, which may or may not be taxable. Some states have no official tax authority regarding SaaS, and for these, you may need a Private Letter Ruling to receive specific guidance for your company. 

 

State Requirements Regarding Sales Tax on Software-as-a-Service

Below you will find information on which states require sales tax on Software-as-a-Service. This is a long read with a lot of information. If you are only interested in finding information about a specific state, you can just follow the links below to jump close to the information regarding that state.  

 

Jump Ahead to Individual State Software-as-a-Service Requirements:

Alabama

Does Alabama require sales tax on Software-as-a-Service (SaaS)?

Alabama generally does not require sales tax on Software-as-a-Service.

Why does Alabama not require sales tax on Software-as-a-Service (SaaS)?

Alabama does not expressly exempt Software-as-a-Service from sales tax but does define computer software as a sequence of automatic data-processing equipment instructions. Additionally, SaaS is not listed as a service type subject to sales tax within the code. Unofficial guidance previously given by the Department of Revenue stated that it is generally tax-exempt, similar to most other services, so long as the purchaser does not download or possess the software in any way, and is only accessing it via a third party or the seller’s servers. If you sell Software-as-a-Service in Alabama, you may need a Private Letter Ruling to clarify if your product is taxable in their state. 

Where can you go to learn more about why Alabama does not require sales tax on Software-as-a-Service (SaaS)?

AL 810-6-1 defines computer software but does not define Software-as-a-Service as a taxable service type.

 

Arkansas

Does Arkansas require sales tax on Software-as-a-Service (SaaS)?

Arkansas likely does not require sales tax on Software-as-a-Service.

Why does Arkansas not require sales tax on Software-as-a-Service (SaaS)?

Arkansas does not explicitly identify Software-as-a-Service as taxable or tax-exempt within its code. However, all computer software delivered electronically is treated as non-tangible and tax-exempt. Additionally, Arkansas does not list Software-as-a-Service as a taxable service type.  If you sell Software-as-a-Service in Arkansas, you may need a Private Letter Ruling to clarify if your product is taxable in their state. 

Where can you go to learn more about why Arkansas does not require sales tax on Software-as-a-Service (SaaS)?

AR G.R. 25 defines computer software and taxability; A.C.A. § 26-52-304 states that computer software does not include that which is delivered electronically.

 

Arizona

Does Arizona require sales tax on Software-as-a-Service (SaaS)?

Arizona generally requires sales tax on Software-as-a-Service.

Why does Arizona require sales tax on Software-as-a-Service (SaaS)?

Although SaaS is not expressly defined in Arizona Administrative Code, a private letter ruling defines SaaS as a model of software delivery in which the vendor hosts the software application and customers access it over a network (i.e. the Internet using a web-based user interface). Customers do not own the software license but pay on a subscription basis to use the software. However, it is important to note that Private Letter Rulings are taxpayer specific and cannot be used for another business in the event of an audit. If you sell Software-as-a-Service in Arizona, you may need a Private Letter Ruling to clarify if your product is taxable in their state. 

Where can you go to learn more about why Arizona requires sales tax on Software-as-a-Service (SaaS)?

Arizona Private Letter Ruling LR10-007 identifies leased and subscription-based software as taxable.

 

California

Does California require sales tax on Software-as-a-Service (SaaS)?

California generally does not require sales tax on Software-as-a-Service.

Why does California not require sales tax on Software-as-a-Service (SaaS)?

Software accessed on a remote network (i.e. via the Internet) that does not involve the customer receiving a hard copy of the software or taking possession or control of the software is not considered tangible personal property. However, if possession of tangible media is transferred to the customer, the entire sale would then be treated as taxable. Transfers of software or information by electronic means are also not taxable.

Where can you go to learn more about why California does not require sales tax on Software-as-a-Service (SaaS)?

CA Rev. & Tax Code Sec. 6016 defines tangible personal property; CA BTLG Reg. 1502 addresses the sale and lease of computer software and data processing services.

 

Colorado

Does Colorado require sales tax on Software-as-a-Service (SaaS)?

Colorado likely does not require sales tax on Software-as-a-Service.

Why does Colorado not require sales tax on Software-as-a-Service (SaaS)?

Sec. 39-26-104 of the Colorado Revised Statutes identifies services that are considered taxable. SaaS is not identified as a taxable service within these guidelines. Additionally, any software delivered via remote telecommunications is not taxable in the state. Based on this information, SaaS is likely not taxable. However, if you sell Software-as-a-Service in Colorado, you may need a Private Letter Ruling to clarify if your product is taxable in their state. 

Where can you go to learn more about why Colorado does not require sales tax on Software-as-a-Service (SaaS)?

C.R.S. 39-26-104 defines taxable services.

 

Connecticut

Does Connecticut require sales tax on Software-as-a-Service (SaaS)?

Connecticut generally requires sales tax on Software-as-a-Service, but at a reduced rate.

Why does Connecticut require sales tax on Software-as-a-Service (SaaS)?

Connecticut advises that software delivered electronically and data processing services are taxable. This includes software offered through a subscription service. SaaS falls within computer and data processing services, which is taxable at a reduced rate.

Where can you go to learn more about why Connecticut requires sales tax on Software-as-a-Service (SaaS)?

CT P.S. 2006(8) is a policy statement on the taxation of computer software and services; CT Special Notice 2019(8) addresses the taxation of digital products and software.

 

District of Columbia

Does the District of Columbia require sales tax on Software-as-a-Service (SaaS)?

The District of Columbia generally requires sales tax on Software-as-a-Service.

Why does the District of Columbia require sales tax on Software-as-a-Service (SaaS)?

SaaS is not expressly defined in Washington, D.C. tax code. However, D.C. passed emergency legislation in 2018 indicating that all electronically or digitally delivered, streamed, or accessed digital products are subject to sales and use tax effective January 1, 2019. Based on this legislation, Software-as-a-Service is likely subject to sales tax. If you sell SaaS in the District of Columbia, a Private Letter Ruling may be needed.

Where can you go to learn more about why the District of Columbia requires sales tax on Software-as-a-Service (SaaS)?

D.C. Title 9 Sec. 474.4 discusses the taxation of data processing services. D.C. Act 22-556 is the emergency legislation passed regarding the taxability of digital products.

 

Florida

Does Florida require sales tax on Software-as-a-Service (SaaS)?

Florida generally does not require sales tax on Software-as-a-Service.

Why does Florida not require sales tax on Software-as-a-Service (SaaS)?

Florida’s laws and regulations do not specifically address Software-as-a-Service. However, the Florida Department of Revenue has held that Software-as-a-Service is not subject to sales tax and a Technical Assistance Advisement (the state’s form of Private Letter Ruling) has been issued addressing SaaS taxability. Florida defines software services as those which are provided by the taxpayer to the end-user through the Internet, a telephony network or a private network, on a rental, subscription or services basis. In the Technical Assistance Advisement 16A-014, Florida states that the sale of subscriptions to software and the sale of cloud-computing services are not subject to Florida sales tax so long as the software or cloud-computing service is delivered electronically and there is no delivery of a tangible product. An additional Technical Assistance Advisement (14A19-001) was published which states that information technology infrastructure intended for computing power or storage capacity as well as data transfer fees are exempt from sales tax as well. If you sell Software-as-a-Service in Florida and would like additional clarification on the taxability of the service you are providing, you should get a Technical Assistance Advisement.

Where can you go to learn more about why Florida does not require sales tax on Software-as-a-Service (SaaS)?

T.A.A. 16A-014 and TAA No. 14A19-001 are the Technical Assistance Advisements addressing the taxability of Software-as-a-Service and subscriptions to software.

 

Georgia

Does Georgia require sales tax on Software-as-a-Service (SaaS)?

Georgia generally does not require sales tax on Software-as-a-Service.

Why does Georgia not require sales tax on Software-as-a-Service (SaaS)?

Georgia has held that computer software delivered electronically is not considered a sale of tangible personal property and is not subject to sales tax. Two rulings (LR SUT 2014-05 and LR SUT 2014-01) have also been published stating that cloud-based subscription services that give end-users access to, and use of, software via the Internet is not subject to sales tax. This is because cloud subscription services are not listed as a taxable service in Georgia Code and the transaction does not include the exchange of tangible personal property. In Georgia, unless the service is expressly noted as a taxable service, it is considered not taxable.

Where can you go to learn more about why Florida does not require sales tax on Software-as-a-Service (SaaS)?

LR SUT 2014-05 and LR SUT 2014-01 are the rulings published regarding cloud-based subscription services and the use of software via the Internet. G.A. Rule 560-12-2-.111(4) defines computer software and applications and addresses the taxability of the software.

 

Hawaii

Does Hawaii require sales tax on Software-as-a-Service (SaaS)?

Hawaii does not have a sales tax but does have a general excise tax, which is required for Software-as-a-Service.

Why does Hawaii not require sales tax but requires general excise tax on Software-as-a-Service (SaaS)?

Hawaii requires a general excise tax on certain transactions and activities. Services, as defined by Sec. 237-23.5, include, “the use of computer software and hardware.” Because Software-as-a-Service is a cloud-based software for use by consumers, it would fall under this definition and be considered a non-exempt service.

Where can you go to learn more about why Hawaii does not require sales tax but  requires general excise tax on Software-as-a-Service (SaaS)?

Hawaii Sec. 237-13-23.5 identifies non-exempt services subject to general excise tax. You can also learn more about Hawaii’s General Excise Tax on this blog.

 

Never Deal With Filing a Sales Tax Return Yourself Again

Let our team of experts handle it for you with our Done-for-You Sales Tax Service.

Iowa

Does Iowa require sales tax on Software-as-a-Service (SaaS)?

Iowa requires sales tax on Software-as-a-Service.

Why does Iowa require sales tax on Software-as-a-Service (SaaS)?

Iowa’s Streamlined Sales and Use Tax Act defines services as all acts or services rendered, furnished or performed other than services used in processing of tangible personal property. The tax is due and collectible when the first use of the service is received by the ultimate user of the service. The code lists all services for which a tax of six percent is imposed on the sales price from the furnishing of such services. Software-as-a-Service is specifically listed as a taxable service. 

Where can you go to learn more about why Iowa requires sales tax on Software-as-a-Service (SaaS)?

Iowa Code 423.2(6)(bu) specifically identifies Software-as-a-Service as a service subject to tax. Iowa Code 423.1 defines services.

 

Idaho

Does Idaho require sales tax on Software-as-a-Service (SaaS)?

Idaho generally does not require sales tax on Software-as-a-Service.

Why does Idaho not require sales tax on Software-as-a-Service (SaaS)?

Idaho Statute 63-3616 defines remotely accessed computer software as computer software that a user accesses over the Internet or through wireless media where the user has only the right to use or access the software but does not receive permanent right of use. The state excludes remotely accessed computer software from being subject to sales tax as it is not considered tangible personal property that can be seen, weighed, measured, felt or touched. Also, it is not exchanged in sale and the user is only given access through a license, lease, subscription, service or other agreement. Software-as-a-Service is also not a defined taxable service type under Idaho’s Sales and Use Tax Administrative Rules.

Where can you go to learn more about why Idaho does not require sales tax on Software-as-a-Service (SaaS)?

Idaho Statute 63-3616 defines “remotely accessed computer software.” Idaho’s Sales and Use Tax Administrative Rules list taxable service types, which does not include Software-as-a-Service.

 

Illinois

Does Illinois require sales tax on Software-as-a-Service (SaaS)?

Illinois likely does not require sales tax on Software-as-a-Service. However, the City of Chicago specifically may require a personal property lease transaction tax on Software-as-a-Service if a sale is made into the jurisdiction.

Why does Illinois not require sales tax on Software-as-a-Service but the City of Chicago requires a lease tax on Software-as-a-Service (SaaS)?

Illinois indicates that the license of software is not a taxable retail sale if: (a) it is evidenced by a written agreement signed by the licensor and the customer; (b) the agreement restricts the customer’s duplication and use of the software; (c) the agreement prohibits the customer from licensing, sublicensing or transferring the software to a third party; (d) the agreement includes a policy within the license agreement regarding providing a copy at minimal or no charge or permitting the licensor to have an archival copy; and, (e) the customer must destroy or return all copies of the software to the licensor at the end of the license period. 

ST 10-0062-GIL advises that if the license of software meets these criteria, the license and subsequent software updates are not subject to the Retailer’s Occupation Tax. However, the Department advises that a formal administrative ruling is a proper forum to receive guidance on transactions involving computer software Application Service Providers and software hosting rather than a private letter ruling. 

Additionally, the City of Chicago is barred from taxing services; however, they have a personal property lease transaction tax, which applies to the lease, rental, and license of certain cloud products including Software-as-a-Service. The City defines taxable cloud products, like Software-as-a-Service, as those in which the lease allows the customer to use the provider’s computer and software to input, modify or retrieve information supplied by the customer. In order for the lease tax to apply, the customer must be located in Chicago. There are some specific exemptions to this tax, including accessing/managing financial accounts, re-leases, and small new businesses.

Where can you go to learn more about why Illinois does not require sales tax on Software-as-a-Service but the City of Chicago requires a lease tax on Software-as-a-Service (SaaS)?

86 Ill. Adm. Code 130-1935(a)(1) establishes criteria for the license of software as not considered a taxable retail sale.  This code also defines computer software as all types of software including operational, applicational, utilities, compilers, templates, shells and all other forms. ST 10-0062-GIL is a letter responding to an annual survey in which Illinois addresses the taxability of cloud computing services. 

City of Chicago Mun. Code 3-32, Form 7550 addresses the personal property lease transaction tax.

 

Indiana

Does Indiana require sales tax on Software-as-a-Service (SaaS)?

Indiana does not require sales tax on Software-as-a-Service.

Why does Indiana not require sales tax on Software-as-a-Service (SaaS)?

Indiana defines Software-as-a-Service as a service provider hosting a software application over the internet for a customer. Software that is remotely accessed from a hosted computer or server or through a pool of shared resources from multiple computers and services (“cloud computing”), without having to download the software to the user’s computer, are not considered retail transactions, and therefore that software is not subject to Indiana sales or use tax. 

Where can you go to learn more about why Indiana does not require sales tax on Software-as-a-Service (SaaS)?

Indiana Information Bulletin #8 addresses the application of sales tax to computer hardware, software, and digital goods. 

 

Kansas

Does Kansas require sales tax on Software-as-a-Service (SaaS)?

Kansas generally does not require sales tax on Software-as-a-Service.

Why does Kansas not require sales tax on Software-as-a-Service (SaaS)?

Kansas states that a lease for sales tax obligation purposes does not include obtaining remote access to someone else’s computer software and equipment via the Internet or other electronic means when a customer does not have control over or have possessory rights to the software or equipment. This includes charges billed by an application service provider. Based on this interpretation, so long as the user does not have ownership or any control over the software and is simply accessing it over the Internet, it is not a lease and not subject to sales tax.

Where can you go to learn more about why Kansas does not require sales tax on Software-as-a-Service (SaaS)?

Kansas Information Guide EDU-71R does not specifically define Software-as-a-Service but does address using software on a remote computer.

 

Kentucky

Does Kentucky require sales tax on Software-as-a-Service (SaaS)?

Kentucky likely does not require sales tax on Software-as-a-Service.

Why does Kentucky not require sales tax on Software-as-a-Service (SaaS)?

Unofficial guidance was provided in a survey response dated August 2011, which advised, “At this time Kentucky only assesses the sales tax on tangible personal property which includes prewritten computer software that the customer downloads; access to prewritten computer software which is stored on a server is not subject to sales tax.” However, because the state does not formally address Software-as-a-Service in its tax law, we recommend a Private Letter Ruling to clarify if your product is taxable in this state.

Where can you go to learn more about why Kentucky does not require sales tax on Software-as-a-Service (SaaS)?

Kentucky does not address Software-as-a-Service in its rules or statutes.

 

Louisiana

Does Louisiana require sales tax on Software-as-a-Service (SaaS)?

Louisiana likely requires sales tax on Software-as-a-Service.

Why does Louisiana require sales tax on Software-as-a-Service (SaaS)?

Louisiana previously published a bulletin advising that software accessed remotely is taxable. However, this bulletin has been temporarily suspended while the state conducts a review of the taxation of digital products. This suspension specifically applies to transactions in which the customer pays an access or subscription fee to obtain the use but not ownership of a website or software. If you sell Software-as-a-Service in Louisiana, you may need a Private Letter Ruling to clarify if your product is taxable in their state. 

Where can you go to learn more about why Louisiana requires sales tax on Software-as-a-Service (SaaS)?

Louisiana Revenue Information Bulletin No. 10-001 addressed the taxation of Software-as-a-Service; however, this has been repealed. 

 

 

Still More Information on Which States Require Sales Tax on Software-as-a-Service

You still hanging in there?  We aren’t done yet!  There is still more information on which states require sales tax on Software-as-a-Service. Remember, you can just follow the links at the top of the post to jump close to the information regarding any states.  

 

Massachusetts

Does Massachusetts require sales tax on Software-as-a-Service (SaaS)?

Massachusetts requires sales tax on Software-as-a-Service.

Why does Massachusetts require sales tax on Software-as-a-Service (SaaS)?

Massachusetts states that even in cases where the vendor of the software gives the user the option to securely access the software on the vendor’s server through the Internet, the functionality of the software is the same. Therefore, the object of the transaction is the use of the software. Requirements for prewritten software are still subject to sales and use tax regardless of the method of delivery (whether with a physical medium, downloadable or accessed via the Internet) or if possession or control is given.

Where can you go to learn more about why Massachusetts requires sales tax on Software-as-a-Service (SaaS)?

830 CMR 64H.1.3 addresses the taxability of software accessed from the Internet.

 

Maryland

Does Maryland require sales tax on Software-as-a-Service (SaaS)?

Maryland does not require sales tax on Software-as-a-Service.

Why does Maryland not require sales tax on Software-as-a-Service (SaaS)?

Maryland recently published a list of tangible personal property and services that are and are not subject to sales and use tax in November 2019, which specifically states that Software-as-a-Service is not subject to sales tax.

Where can you go to learn more about why Maryland does not require sales tax on Software-as-a-Service (SaaS)?

Maryland Sec. 11-101 identifies tangible personal property subject to sales and use tax. Maryland List of TPP and Services was recently published defining what falls under tangible personal property and taxable services.

 

Maine

Does Maine require sales tax on Software-as-a-Service (SaaS)?

Maine likely does not require sales tax on Software-as-a-Service.

Why does Maine not require sales tax on Software-as-a-Service (SaaS)?

Maine specifically addresses the taxability of custom and prewritten software, and identifies prewritten software delivered electronically as subject to sales tax, but does not provide any authoritative guidance on the taxability of Software-as-a-Service if the software is not downloaded and in the possession of the user. However, unofficial guidance has previously been given stating that if the software is not downloaded by the user, it is exempt. If you sell Software-as-a-Service in Maine, we recommend a Private Letter Ruling to clarify if your product is taxable in this state.

Where can you go to learn more about why Maine does not require sales tax on Software-as-a-Service (SaaS)?

Maine Title 36, Part 3, Chapter 213 identifies the taxability of products transferred electronically.  Maine Title 36, Sec. 1752(17) defines tangible personal property, including prewritten computer software.

 

Michigan

Does Michigan require sales tax on Software-as-a-Service (SaaS)?

Michigan does not require sales tax on Software-as-a-Service.

Why does Michigan not require sales tax on Software-as-a-Service (SaaS)?

In the case of Auto-Owners Insurance Co v. Dept of Treasury from 2015, the court identified cloud computing products separate from prewritten computer software as different entities for taxability purposes. The court stated that, so long as the delivery of “code that enabled” the vendor’s system to operate was not included, and the software is only accessed electronically, then it is not technically considered prewritten computer software delivered in any manner. In other words, Software-as-a-Service as a cloud-computing program that is only accessed remotely without delivery of a tangible media and does not include the user taking possession of the program is not subject to sales or use tax.

Where can you go to learn more about why Michigan does not require sales tax on Software-as-a-Service (SaaS)?

Michigan Treasury Update Vol. 1, Issue 2 discusses the case that set precedence to not treat certain forms of cloud computing as subject to tax.

 

Minnesota

Does Minnesota require sales tax on Software-as-a-Service (SaaS)?

Minnesota likely does not require sales tax on Software-as-a-Service.

Why does Minnesota not require sales tax on Software-as-a-Service (SaaS)?

Minnesota states that the making available of a computer on a time-sharing basis for use by customers shall not be considered the granting of a “license to use” for sales tax purposes so long as it is only accessed by remote facilities. In this scenario, it is considered a nontaxable service. Also, in a form of unofficial department guidance, Minnesota responded to a survey in 2011 stating that Software-as-a-Service is not subject to sales tax so long as the seller fully owns and operates the applications; the software is accessed via the Internet by the customers; the software is not transferred to the customer; the customer does not have the right to download, copy, or modify the software; and, the seller bills the customers on a per-use basis or a monthly or annual fee basis. 

Where can you go to learn more about why Minnesota does not require sales tax on Software-as-a-Service (SaaS)?

Minnesota R 8130.0500(Subp. 2) identifies a computer time exception under the License to Use chapter.

 

Missouri

Does Missouri require sales tax on Software-as-a-Service (SaaS)?

Missouri does not require sales tax on Software-as-a-Service.

Why does Missouri not require sales tax on Software-as-a-Service (SaaS)?

Missouri defines Software-as-a-Service as, “a model for enabling ubiquitous, convenient, and on-demand network access to a shared pool of configurable computing resources…” This includes the platform-as-a-service model, infrastructure-as-a-service model, and other service models, but does not include any service model that gives the purchaser the right to use identifiable tangible personal property. Missouri does not require sales tax on Software-as-a-Service, but the service provider must pay sales tax on any tangible personal property used to provide the service.

Where can you go to learn more about why Missouri does not require sales tax on Software-as-a-Service (SaaS)?

Missouri 12 CSR 10-109 discusses the taxation of software, including Software-as-a-Service.

 

Mississippi

Does Mississippi require sales tax on Software-as-a-Service (SaaS)?

Mississippi requires sales tax on Software-as-a-Service.

Why does Mississippi require sales tax on Software-as-a-Service (SaaS)?

Mississippi does not have a general exemption for Software-as-a-Service and states that “computer software sales and services” are taxable. However, if computer software is transmitted by the internet to a destination outside of Mississippi and the first use of the software occurs outside of Mississippi, then the software is not taxable. 

Where can you go to learn more about why Mississippi requires sales tax on Software-as-a-Service (SaaS)?

Miss Code Ann Sec. 27-65-23 specifies that computer software sales and services are taxable. You can find the specific statute for the out-of-state exemption in Miss Code Ann Sec. 27-65-101(1)(ii)

 

Nebraska

Does Nebraska require sales tax on Software-as-a-Service (SaaS)?

Nebraska generally does not require sales tax on Software-as-a-Service.

Why does Nebraska not require sales tax on Software-as-a-Service (SaaS)?

Nebraska does not explicitly define Software-as-a-Service or Cloud Computing in its statutes; however, it does define computer software. Nebraska defines computer software (which is taxable) as a sequence of instructions that directs the computer to process either digital or analog data. Since Software-as-a-Service directs a computer that is not owned by the end-user to process digital or analog data, Software-as-a-Service would not fit under the definition of computer software. Businesses should note that software consulting and implementation fees are taxable in Nebraska and if a material portion of the Software-as-a-Service subscription is for consulting or implementation, it could make the entire transaction taxable. Special consideration also needs to be given for certain web-based software solutions that involve the protection of computer systems, software, or data against unauthorized access or intrusion. Sales of security services are taxable in Nebraska pursuant to Nebraska Sales and Use Tax Regulation 1-101

Where can you go to learn more about why Nebraska does not require sales tax on Software-as-a-Service (SaaS)?

See Reg-1-088 for the definition of software.

 

New Jersey

Does New Jersey require sales tax on Software-as-a-Service (SaaS)?

New Jersey generally does not require sales tax on Software-as-a-Service.

Why does New Jersey not require sales tax on Software-as-a-Service (SaaS)?

New Jersey states that cloud computing and Software-as-a-Service are non-taxable because the software is not “electronically delivered” to the end-user. So long as the software is hosted in the cloud and not delivered to the end-user then it does not fit the definition of taxable personal property. New Jersey further defines Cloud Computing as “… services that allow a customer to access and use the software of a service provider. The software is hosted by a seller that owns, operates, and maintains the software. The seller houses the software on its own servers. Customers access the software via the Internet. The software is not transferred to the customer, nor does the customer have the right to download, copy, or modify the software.”

Where can you go to learn more about why New Jersey does not require sales tax on Software-as-a-Service (SaaS)?

Section 54:32B-3 defines what is taxable, and Informational Bulletin on Cloud Computing TB-72 references Software-as-a-Service.

 

New Mexico

Does New Mexico require sales tax on Software-as-a-Service (SaaS)?

New Mexico generally requires sales tax on Software-as-a-Service and any software delivered electronically.

Why does New Mexico require sales tax on Software-as-a-Service (SaaS)?

New Mexico does not have a statute which explicitly defines Software-as-a-Service, however both canned and custom software is considered taxable, and professional services to create software are taxable in New Mexico. Therefore, Software-as-a-Service is subject to gross receipts tax in New Mexico. You need to pay special attention to how the user license is handled because if the license is transferred to the end-user it could constitute a sale of property (in addition to the sale of tangible personal property) which means the end-user could also be subject to property tax. 

Where can you go to learn more about why New Mexico requires sales tax on Software-as-a-Service (SaaS)?

New Mexico Admin. Code tit. 3, §3.2.1.18 section DD specifies that custom software is taxable in New Mexico. New Mexico Admin. Code tit. 3, §3.2.1.27 section B specifies that the sale of license-to-use software is a sale of property. 

 

Nevada

Does Nevada require sales tax on Software-as-a-Service (SaaS)?
Nevada does not require sales tax on Software-as-a-Service.

Why does Nevada not require sales tax on Software-as-a-Service (SaaS)?

In Nevada, software that is delivered electronically is not considered tangible personal property and is therefore not subject to sales tax. Certain services are taxable in Nevada, however, Nevada does not explicitly define Software-as-a-Service as a taxable service. Therefore, Software-as-a-Service is not subject to sales tax in Nevada.

Where can you go to learn more about why Nevada does not require sales tax on Software-as-a-Service (SaaS)?

Nevada Admin. Code §372.880 defines prewritten software as taxable unless it is delivered electronically. Nevada Rev. Stat. §372.060 does not define Software-as-a-Service as a taxable service. 

 

New York

Does New York require sales tax on Software-as-a-Service (SaaS)?
New York requires sales tax on Software-as-a-Service.

Why does New York require sales tax on Software-as-a-Service (SaaS)?
Although New York has not explicitly defined Software-as-a-Service in its statutes, the Department of Taxation and Finance has issued various advisory opinions indicating that software accessed remotely is taxable. In contrast, readers should note that computing power is considered a non-taxable service in New York and therefore not subject to sales tax. Computing power refers to a specific array of a processor, memory and storage, and is often involved when customers purchase computer instances in order to run their own software applications.

Where can you go to learn more about why New York requires sales tax on Software-as-a-Service (SaaS)?

This tax bulletin published by New York explains how sales tax applies to sales of computer software and related services. This advisory opinion clarifies that cloud computing is not subject to sales tax. The following advisory opinions clarify that Software-as-a-Service is subject to sales tax in New York: TSB-A-13(22)S, TSB-A-09(44)S, TSB-A-09(25)S, TSB-A-09(15)S, TSB-A-08(62)S, and TSB-A-15(2)S.

 

North Carolina

Does North Carolina require sales tax on Software-as-a-Service (SaaS)?

North Carolina likely does not require sales tax on Software-as-a-Service.

Why does North Carolina not require sales tax on Software-as-a-Service (SaaS)?

North Carolina does not expressly exempt Software-as-a-Service from sales tax, but does provide an exemption for “software designed to run on a computer system, an operating program, or application software.” Since Software-as-a-Service is generally hosted and run in the cloud, it is not clear if this exemption would apply. North Carolina has released a Private Letter Ruling which indicates it does not tax Software-as-a-Service. However, Private Letter Rulings are taxpayer specific and cannot be used for another business in the event of an audit. If you sell Software-as-a-Service in North Carolina, you should consider getting a Private Letter Ruling to clarify if your product is taxable in their state. TaxValet can help you with this.

Where can you go to learn more about why North Carolina does not require sales tax on Software-as-a-Service (SaaS)?

G.S Sec. 105-164.13(43) states that an exemption exists for “software designed to run a computer system, an operating program, or application software”. 

 

North Dakota

Does North Dakota require sales tax on Software-as-a-Service (SaaS)?

North Dakota likely does not require sales tax on Software-as-a-Service.

Why does North Dakota not require sales tax on Software-as-a-Service (SaaS)?

North Dakota does not expressly define Software-as-a-Service in its statutes and does not explicitly provide an exemption for Software-as-a-Service. That being said, North Dakota does tax computer software. Computer software is defined as “a set of coded instructions designed to cause a computer or automatic data processing equipment to perform a task”. When the North Dakota Department of Revenue was questioned on whether Software-as-a-Service was taxable, John Quinlan wrote that “If there are no transfers of software, it will not be taxed. We do not tax services which require a fee or subscription to access or use.” Since this comment is non-binding and there is not an explicit exemption for Software-as-a-Service, we recommend getting a Private Letter Ruling if you need a definitive answer on if your specific product is taxable.

Where can you go to learn more about why North Dakota does not require sales tax on Software-as-a-Service (SaaS)?

North Dakota defines computer software and what would be considered taxable in 57-39.2-02.1.1.g.(2) (see page 6).

 

Ohio

Does Ohio require sales tax on Software-as-a-Service (SaaS)?
Ohio requires sales tax on Software-as-a-Service when used in business, but generally does not require sales tax on Software-as-a-Service when intended for personal use.

Why does Ohio require sales tax on Software-as-a-Service for business use and not for personal use?

Ohio requires sales tax on “computer services” that are for use in business. Many activities fall under Ohio’s definition of “computer services” including computer programming and automatic data processing. Ohio broadly defines automatic data processing as the “… processing of others’ data”. Readers should also note that prewritten software is always subject to sales tax in Ohio, and custom software for use in business is subject to sales tax in Ohio.

Where can you go to learn more about why Ohio requires sales tax on Software-as-a-Service for business use and not for personal use?

Ohio AC5703-9-46 defines computer services, computer programming, and what is considered a business function. Ohio RC5739.01 defines what is considered a computer service and automatic data processing. 

 

Oklahoma

Does Oklahoma require sales tax on Software-as-a-Service (SaaS)?

Oklahoma does not require sales tax on Software-as-a-Service.

Why does Oklahoma not require sales tax on Software-as-a-Service (SaaS)?

Oklahoma only requires sales tax on specified services, and Software-as-a-Service is not specified as a taxable service by Oklahoma. Additionally, Oklahoma does not require sales tax on custom or prewritten computer software delivered electronically, so it is safe to say that Software-as-a-Service is not subject to sales tax in Oklahoma. Oklahoma further specifies that “electronic data processing services” are not subject to sales tax.

Where can you go to learn more about why Oklahoma does not require sales tax on Software-as-a-Service (SaaS)?
68 O.S. Sec. 1354(A) defines which services are subject to sales tax in Oklahoma and Software-as-a-Service is not defined as a taxable service. SECTION 710:65-19-156. Internet-related services and transactions specifies that “data processing services” are not subject to sales tax. CHAPTER 65. SALES AND USE TAX defines “data processing services” on page 176.

 

Pennsylvania

Does Pennsylvania require sales tax on Software-as-a-Service (SaaS)?

Pennsylvania requires sales tax on Software-as-a-Service.

Why does Pennsylvania require sales tax on Software-as-a-Service (SaaS)?

Pennsylvania states, “In light of recent case law and technological advances, the Department concludes that because computer software is tangible personal property, electronically accessing taxable software is taxable.” Pennsylvania further states that software is only taxable when the users are based in Pennsylvania, regardless of if the server is located within the state or not. If a portion of users are located within Pennsylvania, and a portion of users are located outside of Pennsylvania, an exemption may apply for the users who are located outside of Pennsylvania.

Where can you go to learn more about why Pennsylvania requires sales tax on Software-as-a-Service (SaaS)?

Pennsylvania Sales and Tax No. SUT-12-001 clarifies that cloud computing services are subject to sales and use tax.

Do You Know Which States You Need to Charge Sales Tax on Software-as-a-Service?

We can help you figure that out with our Sales Tax Starter Kit

Rhode Island

Does Rhode Island require sales tax on Software-as-a-Service (SaaS)?

Rhode Island requires sales tax on Software-as-a-Service.

Why does Rhode Island require sales tax on Software-as-a-Service (SaaS)?

Rhode Island requires sales tax on prewritten software whether it is vendor-hosted or not. Rhode Island defines vendor-hosted software as “prewritten computer software that is accessed through the internet and/or a vendor-hosted server regardless of whether the access is permanent or temporary and regardless of whether any downloading occurs.”

Where can you go to learn more about why Rhode Island requires sales tax on Software-as-a-Service (SaaS)?

R.I. Gen. Laws §44-18-7 specifies that prewritten computer software is subject to sales tax, even if it is vendor-hosted. § 44-18-7.1(g)(vii) defines vendor-hosted computer software.

 

South Carolina

Does South Carolina require sales tax on Software-as-a-Service (SaaS)?

South Carolina requires sales tax on Software-as-a-Service.

Why does South Carolina require sales tax on Software-as-a-Service (SaaS)?

Although South Carolina doesn’t generally require sales tax on software that is delivered electronically, Software-as-a-Service falls under the definition of “communications” which is subject to sales tax. Taxable communication services include (but are not limited to) “Database Access Transmission Services or On-Line Information Services, including, but not limited to, legal research services, credit reporting/research services, and charges to access an individual website (including Application Service Providers)”. But in case you’re wondering, telegram services are exempt under the communications provision. 

Where can you go to learn more about why South Carolina requires sales tax on Software-as-a-Service (SaaS)?

117-329 Communications Services defines taxable communication services (see page 2).

 

South Dakota

Does South Dakota require sales tax on Software-as-a-Service (SaaS)?

South Dakota requires sales tax on Software-as-a-Service.

Why does South Dakota require sales tax on Software-as-a-Service (SaaS)?

South Dakota includes anything delivered electronically in its definition of tangible personal property. South Dakota further specifies that “fees or access charges for access to databases or networks; and … fees or access charges for access to software, programs, or computer systems” are subject to sales tax. 

Where can you go to learn more about why South Dakota requires sales tax on Software-as-a-Service (SaaS)?

64:06:02:78. Computer services — Software specifies that charges to access software or programs are subject to sales tax.

 

Tennessee

Does Tennessee require sales tax on Software-as-a-Service (SaaS)?

Tennessee requires sales tax on Software-as-a-Service.

Why does Tennessee require sales tax on Software-as-a-Service (SaaS)?
Effective July 1, 2015, Tennessee required sales tax on remotely accessed software. Tennessee clarified this in Notice #15-14 which states taxable software “includes the access and use of software that remains in possession of the seller and is remotely accessed by a customer for use in this state. This provision ensures that software remains subject to sales and use tax regardless of a customer’s method of use.” Tennessee goes on to clarify that if the software is purchased for users who will use the software inside Tennessee and outside of Tennessee, then only the portion of users based inside of Tennessee need to pay sales tax. Tennessee would require a completed exemption certificate in order to claim this exemption. If you are purchasing Software-as-a-Service and re-selling it to customers, then a resale exemption could apply.

If sales tax is not required on the Software-as-a-Service, then the Tennessee business should pay use tax instead. If you are creating software for your own use, then use tax would not be due. You should pay special attention to if the Software-as-a-Service you are selling falls under Tennessee’s definition of information or data processing services, as those would not be subject to sales tax.

Where can you go to learn more about why Tennessee requires sales tax on Software-as-a-Service (SaaS)?
Sec. 67-6-231(a) specifies that downloadable software is subject to sales tax in Tennessee. Notice #15-14 provides insight into remotely accessed software and details how to apportion users based on location. 67-6-102 (H) (ii) (k) specifies that an exemption might apply in Tennessee for certain manufacturing-related software. 

 

Texas

Does Texas require sales tax on Software-as-a-Service (SaaS)?

Texas requires sales tax on Software-as-a-Service.

Why does Texas require sales tax on Software-as-a-Service (SaaS)?

While Texas requires sales tax on Software-as-a-Service, you may only have to charge sales tax on 80% of the sale price if the product fits Texas’s definition of a “data processing service.” If you are unsure whether your Software-as-a-Service fits Texas’s definition of a “data processing service” you should consider getting a Private Letter Ruling (we can help you with this). 

Texas states that a “data processing service” is “…word processing, data entry, data retrieval, data search, information compilation, payroll, and business accounting data production … and other computerized data and information storage or manipulation. ‘Data processing service’ also includes the use of a computer or computer time for data processing whether the processing is performed by the provider of the computer or computer time or by the purchaser or other beneficiary of the service. ‘Data processing service’ does not include the transcription of medical dictation by a medical transcriptionist. ‘Data storage,’ as used in this section, does not include a classified advertisement, banner advertisement, vertical advertisement, or link when the item is displayed on an Internet website owned by another person.”

Where can you go to learn more about why Texas requires sales tax on Software-as-a-Service (SaaS)?
Section 151.0035 defines what is considered a data processing service in Texas. Sec. 151.351 states that the first 20% of the sale price of a data processing service is not subject to sales tax in Texas.

 

Utah

Does Utah require sales tax on Software-as-a-Service (SaaS)?

Utah requires sales tax on Software-as-a-Service.

Why does Utah require sales tax on Software-as-a-Service (SaaS)?

Utah refers to Software-as-a-Service as “remotely accessed software” provided by an “application service provider”. Utah states that remotely accessed software includes hosted software, application service provider (ASP) software, Software-as-a-Service (SaaS), and cloud computing applications. License fees for remotely accessed prewritten software are taxable if the purchased software is used in Utah. If remotely accessed software is used at more than one location and at the time of the transaction, the buyer provides the seller a reasonable and consistent method for allocating the transaction between those locations, the seller must source the transaction to those locations. If the buyer does not provide the seller with a method of allocating a transaction that is used in multiple locations, the seller must source the transaction to the buyer’s address.

Where can you go to learn more about why Utah requires sales tax on Software-as-a-Service (SaaS)?
Utah released Pub 64 Sales Tax Information for Computer service Providers to provide more details on how sales tax applies to computer software. Utah defines prewritten software in 59-12-102(82)(b) (see page 20). Utah defines “computer software” on page 7 of 59-12-102(27).

 

Virginia

Does Virginia require sales tax on Software-as-a-Service (SaaS)?

Virginia does not require sales tax on Software-as-a-Service.

Why does Virginia not require sales tax on Software-as-a-Service (SaaS)?
Virginia does not require sales tax on Software-as-a-Service as long as it does not involve tangible personal property entering into the state. Transactions for the cloud-based or hosted services are exempt from the retail sales and use tax. Because no tangible personal property is transferred to customers, add-on services and maintenance services required by the Taxpayer are also not subject to the tax. Some applications could be taxable, though, if they fall under the definition of a communications service.

Where can you go to learn more about why Virginia does not require sales tax on Software-as-a-Service (SaaS)?

Virginia provides an exemption for services not involving an exchange of tangible personal property in Virginia Code § 58.1-609.5. Virginia defines a communication service (which would be subject to sales tax) in Va. Code § 58.1-647 and further explained on this page.

 

Vermont

Does Vermont require sales tax on Software-as-a-Service (SaaS)?
Vermont does not require sales tax on Software-as-a-Service.

Why does Vermont not require sales tax on Software-as-a-Service (SaaS)?

Vermont does not require sales tax on Software-as-a-Service (SaaS), Platform-as-a-Service (PaaS) or Infrastructure-as-a-Service (IaaS). So long as your software does not fall under Vermont’s definition of prewritten software (which is taxable) and is not downloaded to the customer’s computer, then you should not need to charge sales tax. More specifically, “Vermont generally imposes the Vermont Sales Tax on retail sales of tangible personal property. Tangible personal property is defined to include prewritten computer software in 32 V.S.A. § 9701(7). However, prewritten software accessed remotely and not installed on a computer does not fall within this definition.”

Where can you go to learn more about why Vermont does not require sales tax on Software-as-a-Service (SaaS)?
For further clarification on what software is and is not taxable in Vermont, check out Pub FS-1213. Vermont defines computer software in VT Regulations 1.9701(7)-2 (see page 7). Pay special attention to if your software falls under the definition of prewritten computer software as that could mean it is subject to sales tax.

 

Washington

Does Washington require sales tax on Software-as-a-Service (SaaS)?
Washington requires sales tax on Software-as-a-Service.

Why does Washington require sales tax on Software-as-a-Service (SaaS)?

Washington requires sales tax on any prewritten or custom software “where possession of the software is maintained by the seller or a third party, regardless of whether the charge for the service is on a per use, per user, per license, subscription, or some other basis”. You will likely also owe Business & Occupation tax on the sale of the service. This tax is not collected from customers and instead is paid for directly by the seller.

Where can you go to learn more about why Washington requires sales tax on Software-as-a-Service (SaaS)?
Washington specifies that remotely accessed prewritten and custom software is taxable in Wash. Rev. Code §82.04.050(6). Washington provides examples of how they tax software in WAC 458-20-15502.

 

Wisconsin

Does Wisconsin require sales tax on Software-as-a-Service (SaaS)?

Wisconsin does not require sales tax on Software-as-a-Service.

Why does Wisconsin not require sales tax on Software-as-a-Service (SaaS)?

Wisconsin will not require sales tax on Software-as-a-Service as long as the software is located on the vendor’s servers, the customer does not operate the vendor’s server (or control its operation) and the customer does not have physical access to the vendor’s server. This also assumes that the vendor is not providing a taxable service (for example, a telecommunications messaging service) in the transaction. 

Where can you go to learn more about why Wisconsin does not require sales tax on Software-as-a-Service (SaaS)?

Sales and Use Tax Treatment Computer – Hardware, Software, Services (October 1, 2009 and Thereafter) explains how Wisconsin handles sales tax for computer software. 

 

West Virginia

Does West Virginia require sales tax on Software-as-a-Service (SaaS)?
West Virginia likely requires sales tax on Software-as-a-Service.

Why does West Virginia require sales tax on Software-as-a-Service (SaaS)?
West Virginia generally requires sales tax on Software-as-a-Service. However, an exemption might apply if you are selling qualified data processing services. In general, custom and prewritten software are taxable in West Virginia regardless of the method of delivery (for example, downloaded). West Virginia has defined computer software (which is taxable) as “a set of coded instructions designed to cause a computer or automatic data processing equipment to perform a task”. Transactions involving Software-as-a-Service are taxable since West Virginia only exempts specified services. 

In West Virginia, an exemption applies to the provision of access to computer equipment for the purpose of processing data or examining or acquiring data stored in the computer equipment, so long as (1) the electronic data processing service is performed for another person who is in no way part of the entity performing the service, and (2) the charge is actually and only for the sale of electronic data processing services and does not include any charges for other activities. Other criteria apply for this exemption.

Where can you go to learn more about why West Virginia requires sales tax on Software-as-a-Service (SaaS)?
West Virginia defines computer software in W.Va. Code Sec. 11-15B-2(b). You can read more about the exemption that applies to data processing in Reg. Sec. 110-15-9.3.21.

 

Wyoming

Does Wyoming require sales tax on Software-as-a-Service (SaaS)?
Wyoming generally does not require sales tax on Software-as-a-Service.

Why does Wyoming not require sales tax on Software-as-a-Service (SaaS)?
Wyoming generally does not require sales tax on Software-as-a-Service (SaaS) so long as there is no tangible personal property (like a CD-ROM or disk drive) exchanged. More specifically, Wyoming states, “Providing a platform where customers can access hosted software via an internet connection, such as the most common cloud computing service models of Software-as-a-Service (SaaS), Platform-as-a-Service (PaaS), and Infrastructure-as-a-Service (IaaS), are not subject to Wyoming sales tax provided the customer does not receive any tangible personal property or enumerated service embedded within the service.”

Where can you go to learn more about why Wyoming does not require sales tax on Software-as-a-Service (SaaS)?
Wyoming clarifies that Software-as-a-Service, Platform-as-a-Service, and Infrastructure-as-a-Service are not taxable in the Wyoming Computer Sales Services Industry Publication

Disclaimer: Our attorney wanted you to know that no financial, tax, legal advice or opinion is given through this post. All information provided is general in nature and may not apply to your specific situation and is intended for informational and educational purposes only. Information is provided “as is” and without warranty.

Submit a Comment

Your email address will not be published. Required fields are marked *

Determine Your Company's Audit Risk and How To Minimize It

 

 

Business owners and accountants can get a custom report to learn:

 

 

* If your audit exposure is high, medium, or low

 

* How to minimize your audit risk

 

* How your current sales tax management compares to peers

 

You have Successfully Subscribed!

Share This