Sales Tax on SaaS. What I Learned, and You Should Know!

Short answer: most states now tax SaaS in some form, and since the Supreme Court’s 2018 Wayfair decision you can be required to collect sales tax in states where you have no office at all, based purely on your sales volume there. It is a state-by-state patchwork, the form and substance of your agreement affect it, and you are liable whether or not you actually collected.

Years ago I was presenting on SaaS contracts at the OpenView CFO Forum, and the Grant Thornton tax folks there opened my eyes to how messy SaaS sales tax was. It has only gotten more consequential since, so here is the current lay of the land for a software vendor.

1. The Wayfair Sea Change.

The old rule was simple: no physical presence in a state, no obligation to collect its sales tax. South Dakota v. Wayfair (2018) blew that up. States can now impose an “economic nexus,” meaning once your sales into a state cross a dollar or transaction threshold (often around $100,000 in sales or 200 transactions, though it varies by state) you can owe sales tax there with zero physical presence. For a SaaS company selling nationwide from a laptop, that can mean collection obligations in dozens of states. (I cover the mechanics in Collecting Sales Tax on Software.)

2. Whether SaaS Is Even Taxable Is State by State.

States do not agree on what SaaS is. Some tax it as the sale of tangible personal property or “prewritten software,” some tax it as a data-processing or information service, and some do not tax it at all. So the same subscription can be taxable in one state and exempt in the next, and your hosting location, your location, and your customer’s location all enter the picture. It is genuinely messy, and you have to map it state by state (many states coordinate definitions through the Streamlined Sales and Use Tax Agreement, but plenty do not).

3. The Form and Substance of Your Agreement Matter.

What you call the agreement (a “software license,” a “subscription services agreement,” a “professional services agreement,” or some hybrid) can affect the tax characterization, and so can what you actually deliver. This is one more reason the contract is a business document, not just a legal one. Build a clause into your agreement making the customer responsible for any sales, use, and similar taxes, so a later tax bill does not come straight out of your margin.

The Practical Move.

Remember that you are liable for the tax whether or not you collected it from the customer, so getting this wrong is expensive and compounds quietly over time. Do not try to eyeball it. Get a state-and-local-tax (SALT) advisor to run a nexus study once you are selling at any scale, and add the tax-responsibility language to your paper now. I hope this helps.

Sales Tax on SaaS: Common Questions.

Is SaaS subject to sales tax? In many states, yes, but it varies. Some states tax SaaS as software or a data service, and some do not tax it at all, so you have to map it state by state.

Do I owe sales tax in states where I have no office? You can. After South Dakota v. Wayfair (2018), a state can require you to collect based on economic nexus once your sales there cross a dollar or transaction threshold, with no physical presence required.

Who is liable if I did not collect it? You are. The vendor is liable for the tax whether or not it collected from the customer, which is why a tax-responsibility clause and a nexus study both matter.

Resources:

• Collecting Sales Tax on Software
• Tax on International SaaS Transactions
• SaaS Revenue Recognition (These Rules Are Different)

Disclaimer:

This post is for informational and educational purposes only, and is not legal advice. You should hire an attorney if you need legal advice, which should be provided only after review of all relevant facts and applicable law.