Texas SaaS Sales Tax: What You Need to Know
Every business that sells software or Software as a Service (SaaS) products and services must pay close attention to how it is taxed. There are differences in how each state charges firms. If you are asking yourself “Is SaaS taxable in Texas?” The state accrues a state sales tax of 6.25% with many local governmental units adding another 2%, bringing the total to 8.25%.
Furthermore, Texas has a complicated taxation policy regarding digital products, making the process of taxing such goods and services difficult to understand especially for those who don’t have knowledge about the process. This is where TaxCloud has clients covered.
TaxCloud assists SaaS companies with compliance in state-specific areas such as Texas with their cutting edge features and solutions. We are offering a free 30-day trial where you can experience how we became trendsetters in streamlining the complex taxation process and helping clients stay compliant with the state’s local laws.
How Texas Taxes Software as a Service (SaaS)
Texas, like several US states, considers Software as a Service (SaaS) taxable as a data processing service. The Texas Administrative Code characterizes data processing services as “the processing of information for the purpose of compiling and producing records of transactions, maintaining information, and entering and retrieving information,” which includes SaaS activities.
The state of Texas exempts 20% of the data processing services charges. As a result, businesses have to apply sales tax only on 80% of the entire amount they charge for their SaaS products. When a company sells its service for $100, only $80 gets taxed at the state’s 6.25% sales tax and the local taxes.
These businesses must make sure they keep an eye on these taxes for compliance, but also make use of the possible exemptions.
Understanding Texas Sales Tax on Digital Products
Similar to Arizona, Texas sales tax for digital services and online services is charged depending on their category. Companies that sell software must be familiar with these tax rules to stay compliant and avoid fines.
SaaS Products
Software as a Service (SaaS) is considered a taxable form of data processing service, meaning it incurs a sales tax. The state does allow for a 20% exemption which means that 80% of the charge is subject to tax. This tax is applicable whether the software is cloud-based or provided as a subscription service.
Downloaded Software
Downloaded software, including pre written and off the shelf products, is categorized as tangible personal property and is taxable without exemptions. Whether the software is shipped with a disk or downloaded, Texas sales tax applies. Businesses that sell standard software need to ensure that they are charging the appropriate sales tax for their customer’s location.
Custom Software
In Texas, laws regarding custom-built software differ. In the case where a company creates software for a unique client, and it is not available for distribution or reselling, that product is non-taxable service as the state of Texas does not charge sales tax on professional services.
Accurate sales tax collection and reporting is key in ensuring authorities that customers have paid the right amount during audits. Businesses that provide SaaS and tailored software solutions need to consider working with specialists or even use automated programs to correctly manage their taxation throughout Texas.
SaaS Taxability in Texas
Considered a data processing service, Software as a Service (SaaS) or software taxability in Texas is subject to 6.25% sales tax under Texas laws. Local governments can add up to 2%, leading to users paying around 8.25%. The state of Texas provides 20% exemption on sales, meaning that 80% of the fee charged is taxed.
As an example, a SaaS vendor who bills $100 for a service would pay taxes on $80, which at the 8.25% maximum sales tax would equal $6.60.
In relation to the effects of taxability, Business-to-Business (B2B) or Business-to-Consumers (B2C) sales are treated the same with neither being exempted from sales tax. There are some limited exemptions. For example, a business that buys SaaS for the purpose of reselling can provide a resale certificate to the seller. Like other sales to private businesses, purchases available to governmental agencies and certain non-profit bodies may be exempted, but only if the proof is provided.
Thus, how the buyer qualifies as a business or a consumer does not affect the taxability of SaaS in Texas. However, the purpose for which the software is being bought creates tax liability.
A full understanding of these guidelines is necessary for SaaS providers in Texas so that they can remain compliant, and claim any exemptions that apply.
When Does a SaaS Business Have Nexus in Texas?
In Texas, a SaaS company can create a “nexus” through physical or economic means.
A business has physical nexus if it conducts business in the state of Texas and has an office, employees, and owns property. On the other hand, an economic nexus of over $500,000 from sales regardless of having a physical presence in Texas. This includes all sales whether taxable, nontaxable, or tax-exempt.
When a business hits nexus, it must register for a Texas sales tax permit, which requires the company to collect and remit sales tax for sales made to clients.
Remote SaaS companies are required to comply with these provisions even without a physical presence in Texas if the sales into the state custody surpass the mandated figure. Texas economic nexus statutes mean that out-of-state SaaS providers that qualify must collect Texas sales tax and remit it to the state.
How to Stay Compliant with Texas SaaS Sales Tax
To stay compliant with Texas cloud software tax regulations for Software as a Service (SaaS) businesses, the following practices can work wonders:
Charging The Right Amount
SaaS services are considered a taxable data processing service in Texas and the state offers 20% exemption of the cost of SaaS products. While computing sales tax, sales tax charge will be taxed on 80 percent of the service fee. So if a SaaS service costs $1,000, sales tax will be applied to $800.
Monitoring The Nexus
Routinely evaluate your business activities to ascertain whether you have established a nexus in Texas. If the gross revenue from Texas exceeds 500,000 dollars, the nexus has been established, requiring companies to collect and remit sales tax.
Record Keeping
Records of all sales and taxes such as exemption certificates and other relevant documents should be collected and maintained for at least 4 years. These are good reporting practices that help companies during the audit process.
Consult Experts on Tax Policies
Tax policies evolve over time, thus it is advisable to periodically check the Texas Comptroller site and subscribe for notifications to ensure adherence to new or changing laws.
These practices will make it easier for SaaS companies to stay compliant with Texas tax laws and avoid running into issues of non-compliance.
Texas Sales Tax Compliance with TaxCloud
Compliance with the Texas state sales tax can be a complex process especially with the regulations, TaxCloud handles this task effortlessly with real time tax calculations, automated reporting, as well as multi-state compliance features.
Businesses using TaxCloud are able to calculate and pay Texas sales tax accurately, while also benefiting from the state’s data processing services exemption of 20%, meaning only 80% of the SaaS charge is taxable.
TaxCloud also makes it easier for multi-jurisdiction businesses by automating compliance features enabling fast and easy tax adhere to taxation laws in multiple states. Register now for out free-of-cost 30-day trial and experience the benefits TaxCloud has to offer.
Final Thoughts
It is important for Texas-based businesses to be informed about the Texas SaaS sales tax framework to adhere to the taxation laws. Texas defines SaaS as a data processing service that is taxable, therefore companies are required to charge and pay sales tax on transactions. Nevertheless, the state offers a 20% exemption; hence only 80% of the SaaS charge is taxable.
SaaS companies can efficiently manage their Texas sales tax obligations by staying up to date and utilizing the proper resources such as an automated tax calculations and management solution like TaxCloud.
Get started with a free 30-day trial of TaxCloud today and simplify your Texas SaaS sales tax compliance.