We have an important alert for all software-as-a-service (SaaS) companies: you might be subject to sales tax. While most of us think of sales tax as applying to tangible goods, plenty of states have implemented this tax for software products, too.
Fortunately, if you’re operating in a state that puts sales tax on SaaS, this isn’t an added cost your company needs to cover. You do, however, need to register to collect that sales tax from your customer, and be sure to pay it to the appropriate tax authority by the deadline. If you don’t take all of these steps, you could need to cover the sales tax from your own company coffers.
Clearly, then, this can all get complicated — and expensive.
We’re here to try to make this as painless as possible. Let’s explore the basics that founders and finance teams need to know about sales tax for SaaS.
What is sales tax — and how does it apply to SaaS companies?
If you’re reading this guide, you’re probably trying to figure out two things. First, do you need to collect/remit sales tax? Secondly, if so, how do you do that?
Thanks to complications like state nexus rules and the prewritten vs. custom software debate, answering that can get pretty tricky. We’re here to try to break it down as much as possible. So let’s start by setting the scene.
A brief history of sales tax and its application to SaaS products
Sales tax is — as its name suggests — a tax enforced by state and local governments as a way to get revenue from the sale of goods and some services. It got its start in the wake of the Great Depression. States implemented this tax to make up for shortfalls in other revenue sources.
Most states still impose this kind of tax. The states that don’t are somewhat affectionately referred to as NOMAD: New Hampshire, Oregon, Montana, Alaska, and Delaware. Note, though, that while Alaska doesn’t have a statewide sales tax, it does allow sales tax on a local basis (and that extends to sales tax on SaaS).
If you live or work outside of NOMAD, you’re probably very familiar with how this tax plays out in your own life. If we ask you to think about sales tax, you might picture it as a line item on your receipt at the grocery store or your favorite retail spot.
You, as the end user, pay the tax, but the company selling you the taxable good is responsible for collecting that tax and paying the state (or local) tax authority.
Most states primarily apply sales tax to items that qualify as tangible personal property. You would think, then, that services fall outside the scope. But depending on state law, this tax might get implemented for certain categories of services. Professional services (e.g., from doctors, lawyers) are often subject to sales tax, for example.
And because sales tax can get applied to some services, you need to be aware of it if you’re involved in a SaaS company.
Sales tax on software
Decades ago, it made sense that sales tax would include software. To get, say, Microsoft Office on your computer, you needed to go to an office supply store and purchase a physical, CD-ROM-based copy of it. The office supply store would add sales tax for that item just like it would for your ream of paper or box of pens.
With the rise of SaaS, though, hard copies became obsolete. As platforms can now get transferred and accessed via the cloud, state governments have taken note. None too keen to miss out on the revenue generated from taxing SaaS products — an undeniably lucrative market — some have intervened.
Regulation varies from state to state, but more than half of states have opted to apply sales tax to SaaS products in at least some way. In some states, for example, sales are only taxable if it’s a business-to-business (B2B) transaction. In others (namely, Alaska, Colorado, and Illinois), the state doesn’t put sales tax on SaaS but gives local jurisdictions the power to do so.
Regardless, because half of states impose sales tax for SaaS in some way, you need to be informed here. Your business won’t need to pay this tax itself, but you are on the hook for collecting it from the customer and remitting it to the appropriate tax authority.
SaaS sales tax for early-stage startups
If your startup isn’t meaningfully in the black, you might think that sales tax is something you don’t need to worry about yet. But waiting to figure it out can cost you — literally.
If you have sales tax liability now, you will need to settle up with state tax authorities for it eventually. Our partner Anrok found that the average non-compliant company will spend 4.3% of its revenue on historical compliance (i.e., sales tax it didn’t collect in the past).
If you don’t start collecting money from your customers now, you’ll have two options, neither of which are great. You’ll either need to cover that sum from your company’s own coffers, or you’ll need to have some awkward conversations with customers in an attempt to collect sales tax from past transactions.
As a quick note here, you can’t legally collect sales tax from a customer until you’re registered to do so in the applicable state. We’ll cover that more later, but it’s worth calling out for startups as they navigate the requirements that apply.
Location-based sales tax: State-by-state requirements
Each state approaches the sales taxation of SaaS in a different way.
Some states, including big ones like California and Florida, don’t apply a sales tax to SaaS. Others, including Texas and New York, do.
To give you an overview of what to expect in the state(s) in which your SaaS company operates, here’s a map from our partner, Anrok. For a deeper dive, we recommend their state-by-state sales tax guide.
If geography was never your thing, states that impose sales tax on SaaS products, no matter who the end user is, include:
- Arizona
- Connecticut
- Hawaii
- Kentucky
- Louisiana
- Massachusetts
- New Mexico
- New York
- Pennsylvania
- Rhode Island
- South Carolina
- South Dakota
- Tennessee
- Texas
- Utah
- Vermont
- Washington
- Washington, D.C.
- West Virginia
Some of these states are fairly new to the list. Kentucky started imposing sales tax on SaaS in 2023. Louisiana’s House Bill 8, which applies sales tax to software, just went into effect at the start of 2025.
Sales taxation based on B2B/B2C
In other states, the SaaS product’s subjectability to sales tax depends on whether the transaction is B2B or B2C (business-to-consumer).
In Ohio, for example, the state’s Administrative Code specifies, “The provision of automatic data processing services, computer services, or electronic information services in this state for a consideration for use in business by the consumer is a sale that is subject to the sales tax.” In other words, this tax only applies to B2B SaaS sales.
In Iowa, the reverse is true. While SaaS is generally subject to sales tax in the Hawkeye State, there’s an exemption in place when the software is sold to a commercial enterprise. Maryland similarly differentiates between SaaS for individual and commercial use. If the software is sold for commercial use and used within an enterprise computer system, it’s exempt from sales tax.
Local sales tax for SaaS
Some states don’t have overarching sales tax rules for SaaS, but do allow local jurisdictions to impose this kind of tax for software-as-a-service. Those states are:
- Alaska
- Colorado
- Illinois
For additional guidance here, our partner Numeral has state-by-state guides you can leverage. On their blog page, choose “SaaS” from the categories drop-down at the top-right of the page, below the header. Scroll to find the state(s) in which your SaaS company operates. Each Numeral blog has key information like the state’s nexus threshold (more on that next) and sales tax rate.
What nexus means for SaaS sales tax, especially in the post-Wayfair ruling era
Unfortunately, you’re not just subject to sales tax if your company has a physical location in any of the applicable states we just outlined. Everything changed in 2018 thanks to the Supreme Court’s ruling in South Dakota v. Wayfair, Inc.
To explain why this introduced such a fundamental change to tax law across the country, let’s first dig into the concept of nexus.
Definitionally speaking, a nexus is a connection between two things. When it comes to tax law, having a nexus means your business is connected to that tax authority. So if you have a nexus in New York, you’re subject to New York tax laws.
This used to be fairly straightforward. If your company operated out of a jurisdiction, you clearly had a nexus there. But in the digital age, things have changed. Having a remote employee working from another state can be enough to establish a nexus there.
And when it comes to sales tax, things get particularly messy. Thanks to the Wayfair ruling, your company can be subject to local taxation if you have what’s called an economic nexus. You don’t need any sort of physical presence in the state for this to apply.
Each state has its own threshold for economic nexus. You might establish a nexus by selling more than $100,000 of software in that state, or by completing more than 200 transactions there.
If you cross the threshold and establish an economic nexus — or take any action that establishes a physical nexus — a clock starts ticking. At that point, you need to register with state authorities within an allotted amount of time. And once you’re approved by that state authority, you need to begin collecting sales tax.
We’ll talk more about compliance in the next section, but the big takeaway here is: talk to your CPA. They can help you determine where you might have an economic or physical nexus so you know which state’s sales tax laws apply to you.
Local and global sales tax considerations
Many states allow local jurisdictions (i.e., city or county governments) to apply sales tax, and a few states even allow for that without a statewide sales tax on SaaS.
The same is true internationally. Other countries may call it other things — like a value-added tax (VAT) — but the concept of a tax on SaaS sales might apply. Our partner Anrok has a guide to help you get a better feel for global VAT considerations.
All of this highlights the importance of being informed about what applies wherever your company does business. If you’re doing a significant amount of sales in any particular geographic area, discuss that with your CPA. They can help you get the right processes in place, from registration with the applicable tax authorities to collections for any taxes you’ll need to remit to that authority.
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