Which States Consider SaaS Taxable? A State-by-State Look

The landscape of Software as a Service (SaaS) taxation in the United States is rapidly evolving. Unlike traditional tangible goods, SaaS products are delivered digitally, often through subscription models, which complicates their classification for sales tax purposes. Understanding tax obligations is essential for compliance and to avoid penalties. States vary in their approach, meaning a SaaS offering might be taxable in one jurisdiction but exempt in another.

Defining SaaS for Tax Purposes

From a tax perspective, SaaS involves delivering applications over the internet, typically on a subscription basis, without transferring software ownership to the user. This model contrasts with traditional software purchases, where a user downloads and installs the software directly onto a device.

A business’s obligation to collect sales tax on SaaS depends on establishing “nexus” within a state. Nexus signifies a sufficient connection between a business and a state, granting that state the authority to require sales tax collection. Physical nexus is established through a tangible presence, such as having an office, warehouse, employees, or even owning or leasing property in a state. For SaaS companies, this can extend to having remote employees working within a state.

Economic nexus does not require a physical presence. It is triggered when a business exceeds certain economic activity thresholds within a state, typically defined by a specific amount of sales revenue or a number of transactions over a period. The 2018 Supreme Court decision in South Dakota v. Wayfair, Inc. significantly expanded this concept, leading most states to adopt economic nexus standards. While the most common threshold is $100,000 in sales or 200 transactions annually, these figures vary by state.

State-by-State SaaS Taxability Overview

As of 2025, approximately 25 U.S. jurisdictions tax SaaS in some form.

Several states generally consider SaaS taxable. These include:
Alabama
Arizona
Connecticut
Hawaii
Kentucky
Louisiana
Massachusetts
Maryland
New Mexico
New York
Ohio
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Washington
West Virginia

For instance, New York and Texas generally classify SaaS as a taxable service. In Texas, SaaS is specifically considered a data processing service, with 80% of the sale price subject to sales tax, while the remaining 20% is exempt. Connecticut taxes SaaS at the full state sales tax rate for personal use but at a reduced rate of 1% for business use. Ohio taxes SaaS for business use but exempts it for personal use, while Iowa taxes personal use but exempts business use. Maryland taxes personal use fully and business use at 3%.

Many states generally do not tax SaaS. These include:
Arkansas
California
Colorado
Florida
Georgia
Idaho
Illinois
Indiana
Kansas
Maine
Michigan
Minnesota
Mississippi
Missouri
Nebraska
Nevada
New Jersey
North Carolina
North Dakota
Oklahoma
Virginia
Wisconsin
Wyoming

For example, California typically exempts electronically delivered SaaS from sales tax unless it involves a tangible component. North Carolina generally does not subject SaaS to sales and use tax if it is accessed online without any tangible software transfer. Florida has historically exempted SaaS from sales tax.

Some states have conditional taxability, where SaaS is taxed based on specific factors like usage, customization, or delivery method. For instance, Colorado’s taxability depends on the level of customization. Minnesota taxes prewritten SaaS but exempts customized solutions. In Nebraska, SaaS is generally not taxable unless the software is stored on a server in the state.

Common Tax Scenarios and Exemptions

One common complexity arises with bundled services, where SaaS is combined with other services or products. When SaaS is sold as part of a bundle, the tax treatment depends on how states handle the allocation of charges between taxable and non-taxable components. Some states may tax the entire bundle if a taxable component, such as the SaaS license, is a non-incidental part of the transaction, even if other services in the bundle are generally non-taxable. Clear itemization and allocation of charges on invoices can help ensure accurate tax assessment for bundled services.

Business-to-business (B2B) sales may be exempt in some states, or taxed at a lower rate, particularly if the purchasing business provides a valid resale certificate. A resale exemption typically applies when a SaaS provider sells to a software distributor or for white-label services that will be rebranded and resold. If a business customer provides a valid resale certificate, the seller is generally not required to collect sales tax at the time of purchase, with the tax being collected upon the final sale to the end consumer.

Sales to certain non-profit organizations and government entities are typically tax-exempt, provided the SaaS provider collects an exemption certificate from the customer. Some states differentiate between prewritten or standardized software and customized software for tax purposes. Customized software solutions, designed for a specific customer with exclusive rights transferred, may qualify for exemptions in states where only prewritten software is taxed.

The “true object” test, also known as the “essence of the transaction” or “primary function” test, is a framework many states use to determine if a mixed transaction’s primary purpose is a taxable sale of software or a non-taxable service. This analysis examines the purchaser’s intent: whether they primarily sought to acquire tangible personal property (like software) or the expertise of a service provider, with the software being incidental to the service. If the true object is the taxable component, the entire transaction may be subject to tax. However, if the tangible personal property is merely incidental to a non-taxable service, the transaction may be exempt.

Navigating SaaS Sales Tax Compliance

Once a business determines it has nexus and its SaaS offering is taxable in a particular state, the next step is to register for a sales tax permit in that jurisdiction. Registering for a sales tax permit is a legal requirement before a business can begin collecting sales tax from its customers. Most states offer online registration, though some may require a small fee.

Collecting sales tax from customers requires determining the correct tax rate, which can vary by state, county, and even city. States utilize different sourcing rules for SaaS; some apply origin-based sourcing (based on the seller’s location), while most use destination-based sourcing (based on the buyer’s location). Businesses must accurately calculate the tax for each transaction, ensuring any applicable exemptions are applied based on customer status and documentation. Sales tax calculation software can automate this process, applying the correct rates and adjusting for changes in tax laws.

After collection, businesses must report and remit the collected sales tax to the appropriate state authorities. The frequency of remittance, whether monthly, quarterly, or annually, typically depends on the volume of sales tax collected; higher collection amounts usually require more frequent filings. Businesses must maintain detailed records of sales, tax calculations, customer exemptions, and remittances for audit purposes. Many states provide online portals for filing sales tax returns, and even if no tax was collected in a period, a “zero taxes” return might still be required in jurisdictions where a permit is held.