Key takeaways
- SaaS tax rules vary widely by state: Some states tax SaaS as tangible property or data services, while others exempt it entirely—creating major compliance challenges.
- Definitions drive taxability: Whether SaaS is considered “downloaded,” “custom,” or “cloud-based” often determines if it’s taxable, and these definitions differ dramatically across jurisdictions.
- Constant change demands vigilance: With evolving legislation and blurred lines between digital goods and services, accountants must proactively monitor nexus triggers and use automation tools to stay compliant.
In short: SaaS (software as a service) sales tax depends on the state. 22 states tax SaaS, usually as tangible personal property or as a data processing or communication service. 24 states treat SaaS as tax-exempt. Five states, Alaska, Delaware, Montana, New Hampshire and Oregon, have no sales tax at all.
The way states tax software as a service, more commonly called SaaS, is an ever-moving target. Here’s what accountants need to know to advise clients well.
There are currently 16,000 software-as-a-service (SaaS) companies in the US. These companies sell their products, usually by subscription, into states nationwide. But are they watching where their sales trigger nexus? Do they even know where SaaS is taxed?
If they don’t, it’s not entirely their fault. Sales and use tax (SUT) law is complicated, and software tax is no exception. Below, we get you up to speed on SaaS tax across the US. You’ll have the information you need to advise clients well.
Before we dive into SaaS tax details, let’s look at how software is taxed as a whole.
How is software taxed today?
Software tax rules are set by each state. As with all sales and use tax, states can write their own rules on how to tax digital goods, including software. Related reading: Latest US Sales and Use Tax Updates 2024/25.
The main factors that decide how software is taxed include:
- Where the software is canned (one-size-fits-all) or custom
- Whether the delivery is digital (download) or physical (disk)
- Whether the software stands alone or is bundled with services
- What purpose the software serves; (whether it’s for business or personal use)
- Where the seller and end-user are located
- Whether the software is accessed via a cloud-based server
That last bullet point is where SaaS fits in. Keep in mind that several of these factors can apply at once when deciding whether a software type or use case is taxable.
What is SaaS?
Software as a service (SaaS) is a form of cloud computing. A third-party provider hosts the software and delivers it to customers as a service over the internet. In simple terms, SaaS products live in ‘the cloud,’ so they have no physical or tangible presence.
States that tax SaaS usually classify it in one of two ways:
1. As tangible personal property
2. As a data processing or communication service, which is taxable in some states
Which states tax SaaS?
These 22 states currently tax SaaS:
Alabama (Admin. Code r.810-6-1-.37)
Arizona (LR 04-010)
Connecticut (Reg. §12-426-27(b))
District of Columbia (Taxation of Digital Goods)
Hawaii (Rev. Stat. §237-13)
Iowa (S.F. 2417; taxation on digital products)
Kentucky (KRS 139.200(2)(ay); since January 1, 2023)
Louisiana (software access services; since January 1, 2025)
Maryland (Business Tax Tip #29; Sales of Digital Product - page 16)
Massachusetts (Regs. Code tit. 830, §64H.1.3)
New Mexico (Admin. Code tit. 3, §3.2.1.18)
New York (TB-ST-128)
Ohio (Rev. Code Ann. §5739.01)
Pennsylvania (Letter Ruling SUT-12-001)
Rhode Island (Gen. Laws §44-18-7)
South Carolina (Code Regs. Ann. 117-329.4, Revenue Ruling #03-5)
South Dakota (Admin. R. 64:06:02:78)
Tennessee (Code Ann. §67-6-231)
Texas (Admin. Code §3.330)
Utah (Private Letter Ruling, Opinion No. 09-003)
Washington (Rev. Code §82.04.050)
West Virginia (Taxability Matrix)
The reference next to each state points to government-provided information on how that jurisdiction taxes SaaS.
How do states that tax SaaS treat it differently?
States that tax SaaS don’t all apply the same rules. Here are a few examples of unique tax treatment for software as a service.
▪️ Connecticut has different SaaS tax rates for personal and business use. Since October 1, 2019, electronically accessed or transferred canned or prewritten software is taxable at the 6.35% rate. Sales of such software to a business, for use by the business, stay taxable at the 1% rate for computer and data processing services. You can also read Understanding PL 86-272 and What it Means to Your Clients.
▪️ Hawaii technically doesn’t have a state tax. But it does apply a general excise tax (GET) to every good and service not clearly defined as tax-exempt.
▪️ Idaho only taxes certain software types and delivery methods.
▪️ Ohio only requires businesses to pay tax for SaaS products; personal users are exempt.
▪️ Pennsylvania law says SaaS is not taxable if the user is located outside the state.
▪️ South Carolina deems a “charge to access a website” taxable as a communications service.
▪️ Tennessee taxes the use of computer software that “remains in possession of the seller and is remotely accessed by a customer for use in Tennessee”.
▪️ Texas considers SaaS a ‘data processing service,’ which is taxable.
▪️ Utah taxes remotely accessed prewritten software if the buyer uses it in Utah. Remotely accessed custom software is not taxable. Remotely accessed software includes “hosted software, application service provider (ASP) software, software-as-a-service (SAAS), and cloud computing applications.”
▪️ Washington’s revenue code taxes charges for the right to access and use prewritten computer software. This applies where the seller or a third party keeps possession of the software.
This is not a full list. But you can see how small details in state definitions of ‘software’ and related terms lead to muddy SaaS tax rules.
Why does legislative complexity create blurred lines?
SaaS tax rules are blurred because each state records them differently. A quick look shows the need for a more streamlined system. Some states spell out cloud-based software in their general excise tax guidelines. Others have no detailed legislation. Instead, SaaS gets a passing mention in a fact sheet or bulletin that takes determined Google searching to find.
A handful of states don’t mention SaaS at all, as if it doesn't exist. Then businesses and CPAs must work out if SaaS counts as 'software delivered electronically' or similar. This doubt often leads to an inquiry to the department of revenue. The answer sometimes comes as an opinion letter.
These letters offer 'unofficial guidance'. But they give businesses a leg to stand on when assuming SaaS tax is not required, at least until the law adds more detail.
Not all states are unclear, though. Some, like California, Colorado, Florida, and Indiana, specify that cloud-based software is not tangible personal property, so it is not taxable. Illinois and Georgia define SaaS as a nontaxable service. Kansas created its own category and term for SaaS providers: Application Service Providers (ASPs), which are nontaxable.
When a state clearly says cloud-based or electronically delivered software is exempt from sales tax, you can trust that the law is concrete enough to rely on.
In any other case, use your best judgment. Base it on legislative rulings, tangible personal property definitions, opinion letters, and tax bulletins.
These 24 states currently consider SaaS to be tax-exempt:
Arkansas (Regulation GR-25)
California (Revenue & Tax Code §6006)
Colorado (Code of Regulations 60-310)
Florida (Rule: 12A-1.032)
Georgia (LR SUT-2014-05)
Idaho (Code §63-3616(b))
Illinois (86 Ill. Adm. Code 130.1935)
Indiana (Information Bulletin #8)
Kansas (Opinion Letter No. O-2010-005)
Maine (list of taxable services)
Michigan (Department of Treasury Notice, January 6, 2016)
Minnesota (R. 8130.0500, Subp. 2)
Mississippi (Rule 35.IV.5.06 - page 56)
Missouri (Rev. Stat. §144.010)
Nebraska (Information Guide 6-511-2011– currently being updated)
Nevada (Rev. Stat. §372.060)
New Jersey (Technical Bulletin TB-72)
North Carolina (SUPLR 2014-0010)
North Dakota (Cent. Code §Sec. 57-39.2-02.1)
Oklahoma (uniform tax matrix)
Vermont (Stat. Ann. tit. 32 §9701)
Virginia (05-44 Tax Commissioner Ruling)
Wisconsin (Sales and Use Tax Treatment - Computer Hardware & Software)
Wyoming (Wyo. Stat. Ann. §39-15-103)
Also, five states have no sales tax at all: Alaska, Delaware, Montana, New Hampshire, and Oregon.
Many states don’t tax SaaS because they don’t see cloud-based software as tangible personal property. Others use more creative reasons. They focus on how SaaS is served and stored, or who uses it and where.
How do states with no SaaS tax handle it?
States that exempt SaaS still add their own conditions. Here are some examples.
▪️ Maine exempts software from tax as long as it’s not downloaded.
▪️ Michigan revised its rules on electronically delivered software. If only part of a program is delivered electronically, the “incidental to service” test applies. That test decides if the deal is a nontaxable service or a sale of tangible personal property. If a program is downloaded in its entirety, it is taxable.
▪️ Minnesota exempts SaaS unless it’s bought, leased, or licensed to a customer who stores it on a server in the state. Mississippi also requires that the software is stored on a server outside the state.
▪️ New Jersey doesn’t list the use of a software application as a taxable service. But it does specify that information services are taxable. So if a client’s SaaS product counts as an information service, they may owe SaaS tax in New Jersey.
▪️ North Carolina hasn’t adopted any specific cloud computing rules. But in nonprecedential letter rulings, it has found that revenue from cloud-based software accessed over the internet is not taxable. We cover this in more detail in New Tax Laws Passed in California, North Carolina, and Vermont.
▪️ North Dakota states that services that require a fee or subscription to access for use are not taxable.
▪️ Wyoming doesn’t tax SaaS because the buyer doesn’t have permanent use of the product.
One more state also got creative with SaaS legislation: Louisiana.
How did short-sighted software legislation in Louisiana cause far-reaching impact?
Louisiana once treated almost all electronically delivered software as taxable tangible personal property. Over a decade ago, it passed a law with a very broad idea of tangible personal property.
Under that law, electronically delivered information, data, media, or other communication, including software, was tangible (and so taxable) if it was "felt" by sight or sound. This applied even if the information was only viewed on a computer screen in Louisiana and never stored. The law also said one-time use and subscription-based cloud services counted as tangible personal property.
The department's 2010 ruling, Revenue Ruling 10-001, openly stated that charging for software accessed remotely is taxable. Louisiana backed this using a well-known Supreme Court case, South Central Bell Telephone Company v. Sidney J. Barthelemy.
In that case, the Supreme Court looked at whether computer software was tangible or intangible to decide taxability. It found that a buyer of software receives "a certain arrangement of matter" that makes the computer perform a desired function. It held that this arrangement, recorded on a tangible medium, "constitutes a corporeal body." The Court also held that the form of delivery was of no consequence.
That ruling made sense when the judge hit the gavel in 1994. But by 2010, when Louisiana used that case to justify Revenue Ruling 10-001, we lived in a very different world. Businesses suddenly faced large tax liabilities and pushed back. The Louisiana Department of Revenue repealed 10-001 in 2015. It was first called a 'temporary suspension of policy'.
That repeal held for nearly a decade. Since January 1, 2025, however, Louisiana taxes prewritten computer software access services, which covers SaaS.
Why does subscription-based SaaS create nexus nightmares?
Subscription-based SaaS makes nexus hard to predict because billing never stops. These products usually run on a rolling period. Payments come in every day of the month, with no clear start or end to billing cycles.
So it can be very hard to predict when nexus will be triggered. You’re always dealing with seasonality, churn, and other outside factors. These all affect how much your clients bring in from a given state in any month.
You can be proactive about likely trigger states. Help clients see where they’re at risk by completing a full nexus study on their behalf. This simplifies compliance and reduces audit risk. It also lets you flag vulnerable clients and offer more profitable advisory services that protect their business.
How can you take the mystery out of SaaS tax compliance?
The easiest way to handle SaaS tax compliance is to let a tool track the rules for you. As an accountant, clients look to you for expert advice. The problem is, you don't have time to dig through endless legislation, tax bulletins, and court rulings to work out where clients owe SaaS tax.
Legislation changes all the time, and it requires extreme diligence to stay up-to-date on what's happening across 51 states - and to verify that what you’re reading is accurate. If you’re tired of the pain caused by constant legislation changes, let LumaTax bear that burden for you. Ready to take advantage of having real-time access to all the answers? Request a demo today.
How Taxually handles this
Taxually’s LumaTax runs a nexus analysis on your sales, helps you register in the states where you must collect, and prepares and files multi-state sales tax returns, including Canadian GST/HST. LumaTax is currently available to enterprises and accounting firms. For the full workflow, read how to automate US sales tax filing in every state.
Related guides
Frequently asked questions
What is SaaS, and why does it matter for tax compliance?
SaaS (Software as a Service) is cloud-based software accessed online rather than downloaded or installed. Because it’s intangible, states differ on whether and how to tax it, creating compliance challenges.
Do all states tax SaaS?
No. 22 states tax SaaS in some form, while 24 exempt it. Five states—Alaska, Delaware, Montana, New Hampshire, and Oregon—don’t have sales tax at all.
Why is SaaS tax legislation so confusing?
Each state defines software differently. Some classify SaaS as tangible personal property, others as a taxable data service, and many offer no clear guidance, forcing businesses to interpret ambiguous rules.
How do subscription-based SaaS models affect nexus?
Because payments occur continuously, SaaS subscriptions can trigger nexus unpredictably across states. Regular nexus studies help identify risk and maintain compliance.
How can accountants help clients manage SaaS tax compliance?
By monitoring nexus thresholds, staying current on state legislation, and leveraging automation tools like LumaTax, accountants can minimize risk and simplify SaaS tax management.
