SaaS Sales Tax by State: What You Need to Know

Understanding Software as a Service (SaaS) taxation is important for any software business operating within the United States. 

Different states have various regulations concerning the SaaS taxation, States categorize and tax digital products differently, which leads to

To help address this challenge, TaxCloud provides SaaS businesses with an easier way to comply with sales tax laws. We assist businesses in automating tax calculations, enabling them to shift their focus on growth rather than worrying about tackling administrative tasks that come with tax compliance. 

Experience stress free sales tax management by signing up for a free 30 day trial today.

Is SaaS Taxable? An Overview

Before we answer Is Saas taxable? We should discuss what the term means. Software as a Service (SaaS) refers to a subscription service model where the provider offers a software application over the internet.

How It Differs From Traditional Software

Traditional software is purchased with a license and installed on the customer’s setups. They need to be  updated and maintained manually.  SaaS solutions, on the other hand, offer improved accessibility and scalability since the provider is responsible for maintenance and regular updates.

SaaS Taxation – The Complex Process

SaaS services are bogged down by inconsistent taxation because of differing laws. In the United States, SaaS sales tax by state differs, causing confusion on how to treat these products. Certain states, such as Washington, consider SaaS to be a taxable tangible good – while others, like California, consider it a service that does not qualify for taxes or an exempted good. 

Why SaaS Sales Tax Varies by State

The regulations in the Software as a Service (SaaS) sales tax in the U.S. varies from state to state due to the following reasons.

How Digital Products Are Delivered

Some states make a distinction between software that is downloaded and those accessed remotely in a remote system.  Some states apply taxes on downloaded applications but do not tax Software as a Service (SaaS). For example, some states tax “on-premises software” but they don’t charge on SaaS applications. 

State Taxation Policies on Digital Services

Each state has its own definition of taxable goods and services and have changed their tax codes to make SaaS taxable while others provide exemptions to them. 

The Purchaser Itself

Business and individual buyers determine the extent to which SaaS can be taxed. B2B sales are typically tax exempt in most American states as they are viewed as necessary non-taxable services for the economy. 

This adds a greater intricacy level as businesses must determine the tax consequences depending on the customer profile. SaaS providers need to monitor different state tax laws for accurate and compliant tax reporting.

SaaS Sales Tax Rules in Key States

SaaS taxability varies on a state-by-state basis and it can be difficult to understand. Here is a summary of SaaS or software sales tax rules in selected states.

• Arizona: The state of Arizona has made SaaS taxable under the Transaction Privilege Tax (TPT)
• Texas: SaaS is subjected to sales tax because it is classified as a taxable data processing service.
• California: In most cases, California does not tax SaaS services as there is no involvement of tangible personal property.
• New York: New York considers SaaS taxable and charges sales tax on those services but there’s a difference in B2B and B2C sales. The latter transactions are fully taxable, however, if the service is software development or data processing, then it may qualify for an exemption in a B2B transaction.
• Michigan: Similar to California, Michigan does not consider SaaS to be taxable due to omission of a tangible personal property.

How Other States Handle SaaS Sales Tax

Interpretative differences and legislative treatments of SaaS taxation causes disparity in this regard. As of 2025, more than 25 states are expected to impose sales tax on SaaS services while others either exempt them or have specific stipulations.

Connecticut, Hawaii, and New York are some of the few states that regard SaaS as taxable since they treat it as a tangible product or specified service. On the other hand, California, Florida, and Illinois are more lenient as they classify SaaS under sales tax exempt services.

Recent changes in legislation have affected SaaS taxability as well – with the state of Kentucky now taxing SaaS. With the dynamics changing swiftly, compliance with state-specific regulations is becoming important for SaaS providers these days.

How to Stay Compliant with SaaS Sales Tax

Below is a list of practices that help with compliance:

Monitor Nexus and Taxability Across Different States

Regularly determine whether specific activities your company conducts in different regions or countries might create a taxable nexus. Nexus can be established through various means like sales volume, number of transactions, or a physical office location. Automated systems can be used to monitor sales throughout the year so that the businesses can get registered and start collecting the taxes due once certain limits are passed.

Stay Updated About Regulations In Different States

As previously mentioned, sales tax laws are regulated within each state individually and can change over time. To keep up with technological advancements, all states still have customers that should be reviewed periodically. Signing up with state tax agencies or working with tax experts can help alleviate the burden by letting you know when important shifts of law happen that change your obligations.

Put in Place Automated Sales Tax Solutions

Calculating sales tax by hand can be time-consuming and inaccurate. Automated sales tax solutions help make the formerly daunting tasks of tracking tax rates and rules effortless. Automated sales tax systems will accurately calculate taxes, generate necessary reports, and file all documents on time.

Simplify SaaS Tax Compliance with TaxCloud

TaxCloud makes it easier for SaaS companies to comply with sales tax through automated reporting, tax calculations, and multi-state filings. Tax compliance in different states and regions can be difficult, but TaxCloud alleviates the burden with real-time calculations in more than 13,000 jurisdictions. 

We make sure that businesses do not run afoul of state tax provisions by monitoring taxability and filing needs for various states. The multi-state filing system allows clients to remit sales tax that minimizes their administrative workloads. Use our 30-day free trial and experience a whole new way of dealing with SaaS sales tax compliance without any commitments.

Final Thoughts

SaaS companies should have a profound understanding of the state-specific sales tax to stay compliant and protect themselves from possible legal implications. SaaS taxability by state differ significantly, these companies need to stay up-to-date on where and how sales tax must be collected. 

SaaS companies need to have relevant information in order to revise their tax codes. Automated solutions such as TaxCloud can help as they provide accurate calculations and timely filings. Working with the right partners and adopting robust planning strategies, companies should confidently approach the complexities of SaaS sales tax.

Get started with a free 30-day trial of TaxCloud today and ensure your SaaS business stays compliant with sales tax laws.