Multistate – Simplifying Sales Tax for SaaS in the US

Software as a Service (SaaS) Sales tax in the US can be complicated, to say the least.

While the inherent SaaS business model allows for easy selling across the globe, it also adds complexity of understanding the nuances of global/local tax laws.

When a SaaS company sells its product, it is required to follow the tax laws in the region where the product was purchased. That’s sales tax laws in every country, state, province, country, or region where they sell products.

How does the US Sales Tax Work?

There is no federal sales tax in the US which means individual states have their own rules and process for sales tax eligibility and filing.

When it comes to software, the United States breaks them into three categories: Tangible software, downloadable software, and software accessed via the cloud

Is your SaaS Taxable?

States where SaaS is taxable classify SaaS into two primary categories:

  1. Tangible personal property: For eg, the state of New York includes canned or prewritten computer software in its definition of ‘tangible personal property’. In New York, SaaS constitutes the sale of canned or prewritten computer software and thus is taxable as a sale of ‘tangible personal property’.
  2. computer or data processing service, which is taxable in various states. For eg., in Texas, SaaS transactions are treated as a taxable data processing service.

Due to such varying definitions and categorizations, it’s tedious to understand the state sales tax laws for your SaaS business.

Click here to find a summary of the state sales tax rules for SaaS.

For more information

BY Nupura Ughade
June 3, 2020