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Does Your SaaS Company Owe Sales Tax in These 18 States in 2019? Read This to Find Out.

If you look up which states are charging sales tax on SaaS products in 2019, you may have a difficult time getting straight answers. This is primarily due to the fact that sales tax laws affecting SaaS businesses are changing rapidly, and quite frankly, it's hard to keep up.

To help, we compiled a current, comprehensive list of the 18 US states legally requiring businesses to collect sales tax on SaaS products in 2019. This list is current as of April 17th.

Below you'll find:

  • Nexus details for each state that taxes SaaS products
  • Detailed explanations of how each state categorizes and defines and SaaS
  • Links to state tax authority sites, documents, and other reputable sources where you can verify information

If a state is not listed below, it means that state currently does not charge sales tax on SaaS.

Before we dive in to the details, we're going to touch on a couple of broader SaaS tax topics. If you're looking for info on a specific state and want to jump right in, use the link below to navigate to state-by-state details.


Go to the SaaS sales tax state list

SaaS, Legally Defined

In tax legislation, you'll often find pre-written and non-prewritten (aka custom) software broken down into one of three broad categories:

  • Tangible software
    Software that is sold to a customer and is delivered by way of a tangible piece of property; a disk that comes in a case or box, etc.

  • Downloaded software
    Software that is downloaded to a customer's local hard drive and is activated via a purchased user license that allows the customer to access the software.

  • Software accessed via cloud
    Software that is accessed remotely by the customer. Customers typically access cloud software by connecting to the internet, using a web browser to navigate to a secure customer portal, and entering unique login creditials.

Logically, SaaS products fall into the 'software accessed via cloud' category. This classification accounts for any and all software that is not able to be downloaded to a local computer and instead, must be accessed remotely while connected to the internet. Pretty straightforward, right? It would be, if that were the end of the story. Unfortunately...

State Sales Tax SaaS Definitions

States use a variety of different classifications when defining whether SaaS is taxable or not. Some say all software is taxable, regardless of delivery while others list SaaS as a taxable 'data processing service'. Some even lump SaaS products in with tangible software, even though there's no physical element involved. With such varied definitions and categorizations, determining and understanding which states tax software, and more specifically SaaS, can be tedious.

Below, you'll learn how each state currently enforcing SaaS tax collection defines and regulates nexus. You'll also learn how each state categorizes and defines 'software as a service'.

US-Map-SaaS-Tax

Jump to State
Arizona | Connecticut | Hawaii | Iowa | Louisiana | Mississippi
New Mexico | Ohio | Pennsylvania | Rhode Island | South Carolina
South Dakota | Tennesee | Texas | Utah | Washington
Washington DC | West Virginia

18 States That Tax SaaS in 2019

1. Arizona

Nexus Criteria
To date, Arizona does not have economic nexus laws in place, though house bill 2702 could change that soon. For now, businesses only owe Arizona tax on software as a service if they meet a "significant nexus" criteria:

  • Employees present in the state conducting business on behalf of the company
  • Ownership or lease of real or personal property in Arizona
  • Maintenance of an office or place of business in Arizona
  • Delivery of merchandise into Arizona on vehicles owned or leased by the taxpayer
  • Independent contractors or other non-employee representatives present in Arizona for the purpose of establishing and maintaining a market for the taxpayer

How SaaS is Defined in the Tax Code
Arizona considers digital services to be 'tangible personal property', and digital services are taxable under the personal property rental classification. Anything digital is “tangible” because it can be viewed on media in some form, and Arizona considers “accessing” digital services to be the same as renting or leasing tangible personal property. Software is only exempt from transaction privilege tax (TPT) if software is uniquely created for customer.

More Information
Economic Nexus | Software Taxes | Back to State List


2. Connecticut

Economic Nexus Threshold
$250,000 a year in gross revenue and 200 or more separate transactions in the previous calendar year. The state didn't specify a grace period, so it's assumed that once the economic nexus threshold is met, sellers must collect and remit sales tax beggining with the next transaction.

How SaaS is Defined in the Tax Code
In Connecticut, data processing service providers include both sellers of software as a service and application service providers. Therefore, SaaS is considered taxable at the data processing rate of 1%.

More Information
Economic Nexus | Software Taxes | Back to State List


3. Hawaii

Economic Nexus Threshold
Over $100,000 a year in gross revenue or 200 separate transactions into Hawaii in the previous or current calendar year. Nearly all transactions, including resale, count toward both gross revenue and transaction totals. This law became active on July 1, 2018 and applies to taxable years beginning after December 1, 2017. The first filing deadline is based on when the threshold was first met

Hawaii is a bit of a strange case, as there's technically no sales tax charged to consumers. Instead, businesses are required to pay the state a general excise tax (GET), which amounts to between 4% and 4.5% of their total annual gross sales, depending on location. While businesses can just pony up the 4%, it cuts profits, so many business owners pass the GET tax along to their customers. Business owners in most industries are legally allowed to do so as long as quotes and reciepts given to customers clearly state the exact percentage of tax that is or will be added to their total bill.

How SaaS is Defined in the Tax Code
Hawaii's general excise tax (GET) applies to all non-exempt goods and services, and SaaS is considered a non-exempt service. According to Hawaii's Department of Taxation, “services” means legal and accounting services, the use of computer software and hardware, information technology services, database management, and so on.

More Information
Economic Nexus | Software Taxes | Back to State List


4. Iowa

Economic Nexus Threshold
$100,000 or more in gross revenue from Iowa sales or 200 or more separate sales transactions into Iowa in the current or previous calendar year. The state didn't specify a grace period, so it's assumed that once the economic nexus threshold is met, sellers must collect and remit sales tax beggining with the next transaction.

How SaaS is Defined in the Tax Code
Software is taxable as a service, not as a digital product. In Iowa, it's only exempt if it's sold to a commercial enterprise for use exclusively by the commercial enterprise.

More Information
Economic Nexus | Software Taxes | Back to State List


5. Louisiana

Economic Nexus Threshold
$100,000 or more in gross revenue or 200 or more separate gross sales transactions into Louisiana. Remote sellers must register within 30 days of surpassing either threshold. Once approved, the seller should commence collection of sales and use tax on sales for delivery into Louisiana no later than 90 from the date either threshold was met.

How SaaS is Defined in the Tax Code
Louisiana's July 2018 uniform tax matrix lists both prewritten computer software delivered electronically and non-prewritten (custom) computer software delivered electronically as taxable tangible property. Both can be found on the matrix classified as retail computer related products. We put an inquiry out to the Louisiana Department of Revenue to clarify details, and fund out the department is reviewing the taxability of SAAS. Stay tuned! We may have more concrete definitions soon.

More Information
Economic Nexus | Software Taxes | Back to State List


6. Mississippi

Economic Nexus Threshold
If gross sales into Mississippi that exceed $250,000 in the prior twelve months, vendors must register and begin collecting sales tax immediately (before the next transaction).

How SaaS is Defined in the Tax Code
The Mississippi State Tax Commission says, "Computer Software is a collection of computer programs which work in cooperation with one another to perform automated tasks. The gross income received from computer programs or software sales and services is taxable at the regular retail rate of sales tax. Computer program license fees (one-time or annual) and / or maintenance contract income are taxable regardless of how billed."

More Information
Economic Nexus | Software Taxes | Back to State List


7. New Mexico

Nexus Criteria
New Mexico does not currently have an economic nexus threshold, but they expect to have laws in place by January 1, 2021. Once active, sellers with at least $100,000 in total taxable gross receipts from sales, leases, and licenses of tangible personal property, services, and licenses for the use of real property sourced to New Mexico will have to collect and remit taxes.

Current nexus legislation states that criteria sufficient to establish nexus in New Mexico include, but are not limited to, the following:

  • having a business location in New Mexico;
  • having property stored in New Mexico;
  • employing any person in New Mexico;
  • contracting with a salesperson or other agent in New Mexico;
  • leasing equipment used in New Mexico;
  • performing services in New Mexico;
  • licensing the use of intangible property in New Mexico, or transporting property in New Mexico using the taxpayer’s vehicles.

How SaaS is Defined in the Tax Code
SaaS and cloud computing are considered taxable services in New Mexico and are subject to New Mexico’s gross receipts tax, as long as the services are used in New Mexico. In other words, the state doesn't consider the location of the servers where SaaS offerings are accessed; they only consider where services are actively being used when determining taxability.

More Information
Economic Nexus | Software Taxes | Back to State List

8. Ohio

Economic Nexus Threshold
Businesses with $500,000 or more in gross sales sales into Ohio in the current or preceding calendar year must register with the state and pay sales and use tax. The state didn't specify a grace period, so it's assumed that once the economic nexus threshold is met, sellers must collect and remit sales tax beggining with the next transaction.

How SaaS is Defined in the Tax Code
Prewritten computer software is considered tangible personal property in Ohio and is taxable. Additionally, digital products delivered electronically (delivered from the seller to the purchaser by means other than tangible storage media) - including software, music, video, reading materials, or ring tones are considered taxable in the state of Ohio.

More Information
Economic Nexus | Software Taxes | Back to State List


9. Pennsylvania

Economic Nexus Threshold
Businesses with at least $100,000 in annual Pennsylvania gross sales must pay sales tax. There is no transaction count threshold. The state didn't specify a grace period, so it's assumed that once the economic nexus threshold is met, sellers must collect and remit sales tax beggining with the next transaction.

How SaaS is Defined in the Tax Code
Digital products include any product transferred electronically to a customer by download, streaming, or through other electronic means. Common examples of digital products include video, music, books, apps, games, and canned software. “Transferred electronically” means the product is accessed or obtained in a way other than a USB drive, DVD disk or other physical storage.

More Information
Economic Nexus | Software Taxes | Back to State List


10. Rhode Island

Economic Nexus Threshold
Vendors who make $100,000 or more in annual gross sales into the state or those who have more than 200 transactions must pay sales tax. The state didn't specify a grace period, so it's assumed that once the economic nexus threshold is met, sellers must collect and remit sales tax beggining with the next transaction.

Business owners must either agree to collect and remit sales tax on their Rhode Island sales or must agree to comply with use tax notice and reporting requirements for non-collecting sellers.

How SaaS is Defined in the Tax Code
The Rhode Island Division of Taxation states, "As of October 1, 2018, the sale, storage, use, or other consumption of vendor-hosted prewritten computer software, sometimes referred to as 'software as a service', or SaaS, will be subject to Rhode Island’s 7% sales and use tax." This is true regardless of whether the software is downloaded or not and applies regardless of whether the use of the software is temporary or permanent.

More Information
Economic Nexus | Software Taxes | Back to State List


11. South Carolina

Economic Nexus Threshold
$100,000 in gross sales into South Carolina in the previous or current calendar year; includes exempt sales (retail and wholesale), electronically delivered products, and services. Businesses must begin to collect and remit sales tax the first day of the second calendar month after economic nexus is established.

How SaaS is Defined in the Tax Code
Computer software delivered by an application service provider (ASP) is considered sufficiently similar 'database access transsmissions', which are taxable. A database access transmission is defined by the state as "the transmission of a computer database information and programs by and through a modem and telephone lines, whether automatically transmitted or tramsmitted as a result of a subscriber accessing a computer." Therefore, providing access to cloud-based databases, SaaS platforms, and online information services in South Carolina is a taxable service.

More Information
Economic Nexus | Software Taxes | Back to State List


12. South Dakota

Economic Nexus Threshold
Any business with gross revenue from sales into South Dakota that exceeded $100,000 or any business that has made sales for delivery into South Dakota in 200 or more separate transaction in the current or prior calendar year. Businesses must register, collect, and remit sales tax beggining with the next transaction after the economic nexus threshold is met.

How SaaS is Defined in the Tax Code
The gross receipts from the sale of computer software, technical services, and attendant appliances, equipment, and facilities are subject to the retail occupational sales tax. The following are examples of the services, appliances, equipment, and facilities which are taxable: Fees or access charges for access to databases or networks; and fees or access charges for access to software, programs, or computer systems.

More Information
Economic Nexus | Software Taxes | Back to State List


13. Tennesee

Economic Nexus Threshold
When gross sales into the state exceed $500,000 in the previous 12 months, remote sellers must pay sales tax. Businesses must register the first day of the third month following the month in which the threshold was met.

How SaaS is Defined in the Tax Code
The retail sale, lease, licensing or use of computer software, including prewritten and custom computer software, shall be subject to the tax levied by this chapter, regardless of whether the software is delivered electronically, delivered by use of tangible storage media, loaded or programmed into a computer, created on the premises of the consumer or otherwise provided.

More Information
Economic Nexus | Software Taxes | Back to State List


14. Texas

Economic Nexus Threshold
Economic nexus is met if gross revenue (including taxable, nontaxable, and tax-exempt sales) into Texas exceeds $500,000 in the preceding twelve calendar months. This became effective January 1, 2019, but will not be enforced until October 1, 2019. Businesses that meet the threshold must register the first day of the fourth month after the month in which the threshold was exceeded.

How SaaS is Defined in the Tax Code
Data processing services are taxable, and data processing service providers include sellers of software as a service and application service providers.

More Information
Economic Nexus | Software Taxes | Back to State List


15. Utah

Economic Nexus Threshold
Gross revenue of more than $100,000 from the sale of tangible personal property, any product transferred electronically, or services for storage, use, or consumption in Utah; OR sells tangible personal property, products transferred electronically, or services for storage, use, or consumption in Utah in 200 or more separate transactions. Both apply to the past or current year and are effective for sales occurring on or after Jan. 1, 2019.

The state didn't specify a grace period, so it's assumed that once the economic nexus threshold is met, sellers must collect and remit sales tax beggining with the next transaction.

How SaaS is Defined in the Tax Code
Sales tax is imposed on the sale, lease or rental of tangible
personal property and certain services, including remotely accessed software. Remotely accessed software includes hosted software, application service provider (ASP) software, software as service (SAAS), and cloud computing applications.

More Information
Economic Nexus | Software Taxes | Back to State List


16. Washington

Economic Nexus Threshold
There's a lot going on with Washington nexus, and there have been a few changes this year, so bear with us.

Out-of-state businesses without physical presence and more than $100,000 in annual gross retail sales to customers in Washington in the current or preceding calendar year must register, collect, and remit sales tax. This applies to all retail sales, including those made through a facilitator, through your own website, or otherwise.

Collection must begin the first day of the month that starts at least 30 days after the threshold is met. At this time, businesses are required to collect and report for the remainder of the current calendar year, and the following calendar year.

You must also register your business to collect and submit Washington retail sales tax if:

  • Oct 1, 2018 to Dec 31, 2018 -- businesses that had 200 annual transactions with customers in Washington in 2017 or 2018 or
  • Jan. 1, 2019 to March 13, 2019 -- businesses that had 200 annual transactions with customers in Washington in 2018 or 2019.

The 200 transaction criteria was eliminated on March 14, 2019.

For the period Jan. 1, 2018 through June 30, 2019, out-of-state businesses without physical presence making $10,000 to $100,000 in annual gross retail sales to Washington customers must choose to either collect retail sales tax (most common choice), or must do use tax notice and reporting. Learn more about use tax notice and reporting requirements.

How SaaS is Defined in the Tax Code
The state legislature states that all software is considered taxable in the state of Washington, "regardless of whether the charge for the service is on a per use, per user, per license, subscription, or some other basis."

More Information
Economic Nexus | Software Taxes | Back to State List


17. Washington DC

Economic Nexus Threshold
$100,000 or 200 or more separate retail sales in Washington DC in the previous or current calendar year. Businesses must register immediately (next transaction) upon exceeding the defined threshold.

How SaaS is Defined in the Tax Code
The sale, rental, or maintenance of computer software is subject to sales tax whether the software is canned, prepackaged, or customized. Taxable computer software and software services include system software, application software, computer programming, software modification, or software updating. The following are therefore taxable; (1) canned and custom software that’s delivered on tangible personal property, (2) canned and custom software that’s downloaded, (3) canned software that’s been customized, and (4) software as a service

More Information
Economic Nexus | Software Taxes | Back to State List


18. West Virginia

Economic Nexus Threshold
$100,000 in gross sale transactions or 200 or more separate transactions in 2018; vendor responsibility will be determined annually each year thereafter. All gross sales transaction are considered. Businesses must register immediately (next transaction) upon exceeding the defined threshold.

How SaaS is Defined in the Tax Code
The sale of or charges for data processing and information services. For the purposes of this paragraph, the term “data processing service” includes computer programming or software, provided in conjunction with and to support the sale, lease, operation, or application of computer equipment or systems; word processing, payroll and business accounting, and computerized data and information storage and manipulation; the input of inventory control data for a company; the maintenance of records of employee work time; filing payroll tax returns; the preparation of W-2 forms; the computation and preparation of payroll checks; and any system or application programming or software. That's a really long-winded way of saying SaaS is considered a taxable service in Washington DC.

More Information
Economic Nexus | Software Taxes | Back to State List


We'd love to be the partner that takes the stress out of managing sales tax compliance for your SaaS company. Interested? Learn what we have to offer.


Why Sales Tax Collection is Complex

The long list of widely varied state laws regarding economic nexus and SaaS sales tax gives a pretty clear idea on why this regulatory processes is so overwhelming to manage, but what's driving all the changes? Ever since South Dakota v. Wayfair made it's way into the picture, states have been all about redefining their sales tax legislation; and in many cases, this means revisiting which categories of products and services they're collecting tax on. SaaS has been heralded as "...the largest segment of the cloud market, with revenue expected to grow to $85.1 billion in 2019." And this tremendous growth shows no signs of slowing. In fact, revenue is anticipated to top out at $113.1 billion by 2021.

With that kind of money on the table, it shouldn't come as a surprise to see states that previously opted not to collect sales tax on SaaS changing their tune. Especially in today's post-Wayfair world, where economic nexus legislation makes it legal for states collect sales tax on remote sales for the first time ever.

The Pitfalls for SaaS Businesses

In addition to keeping up with frequent law changes, it's stressful for business to manage economic nexus when every state's threshold and nexus rules are different. This is made even more stressful by the fact that many states require businesses to start collecting sales tax on the very next transaction they complete after their threshold has been met; a very tricky proposition in a SaaS setting, where subscription-based users are billed every day of every month.

Overwhelmed by the idea of managing this regulatory beast? Let Lumatax help.

With new laws taking effect all the time, it's critical for businesses to anticipate when economic nexus thresholds will be met, so they're registered and ready to start collecting and remitting sales taxes right away. Neglecting to do so can lead to late-file and non-file penalties that add up quickly.

Without confident accountants and an organized system that simplifies sales tax, this is not easy to accomplish.

Hopefully, this post helped demystify SaaS sales tax. If you need help managing this regulatory burden, take a look at everything LumaTax has to offer. As a SaaS company ourselves, we're intimately aware of the complex nature of state tax regulation, and our expert team can take it all of your plate.