Complete Guide to SaaS Sales Tax

Are SaaS Companies Assessed Sales Tax in the US?

SaaS sales tax is a consumption tax that some U.S. states apply to cloud-based software subscriptions—but whether your product is taxable depends entirely on where your customers are located. There is no federal sales tax in the US, so each state makes its own determination about how to classify and tax software delivered over the internet. This guide covers SaaS taxability by state, nexus thresholds that trigger collection obligations, local jurisdiction taxes, exemptions, compliance steps, and the penalties for getting it wrong.

What is SaaS Sales Tax?

SaaS sales tax is a consumption tax that some U.S. states apply to cloud-based software subscriptions. Unlike physical goods with clear taxability rules, SaaS sits in a gray area—delivered electronically, accessed remotely, and classified differently depending on which state your customer lives in.  The U.S. has no federal sales tax. Instead, each state decides independently whether SaaS is taxable, what rate applies, and under what conditions. As of 2026, 25 US jurisdictions tax some form of SaaS, though the specific rules vary significantly from one jurisdiction to the next.  This patchwork creates real operational challenges. A SaaS company selling to customers in 20 states may face 20 different taxability determinations, rates, and filing requirements—all for the same product.

Is SaaS Taxable in the United States

Is software as a service taxable at the federal level? No. Taxability is determined entirely at the state and local level, which is why SaaS sales tax compliance gets complicated quickly.

What Qualifies as Software as a Service for Tax Purposes

How do tax authorities define SaaS? For tax purposes, SaaS generally refers to software accessed remotely via the internet without downloading or installing anything on local hardware. The customer uses the software through a browser while the vendor hosts and maintains the application on remote servers.

SaaS Sales Tax Rates and Rules by State

Where is SaaS taxable by the state? This is the central question for most SaaS finance teams. The answer varies significantly and changes frequently as states update their digital tax laws.

States Where SaaS Is Fully Taxable

Several large states tax SaaS at the full state sales tax rate, including Texas, New York, Pennsylvania, Washington, Ohio, Massachusetts, and South Carolina. In these states, SaaS is typically classified as taxable tangible personal property, prewritten software, or enumerated digital goods.

If you have nexus in one of these states and sell SaaS to customers located there, you collect and remit sales tax on those transactions.

States Where SaaS Is Not Taxable

Other states exempt SaaS from sales tax entirely. California, Virginia, Florida, and Missouri are notable examples. These states either classify SaaS as a non-taxable service or have not enacted legislation extending sales tax to remotely accessed software.

However, “not taxable” at the state level does not always mean zero tax obligation. Some local jurisdictions within these states impose their own taxes on digital services.

States With Conditional SaaS Taxability

What Is Sales Tax Nexus for SaaS Companies

What triggers a SaaS company’s obligation to collect sales tax? Nexus is the legal connection between a business and a state that creates a tax collection obligation. Without nexus in a particular state, a company has no requirement to collect that state’s sales tax—even if SaaS is taxable there.

Physical Nexus

Physical nexus exists when a company has a tangible presence in a state: employees working there, an office or warehouse, inventory stored there, or equipment located within state borders. For SaaS companies with distributed teams, a single employee working from home in a particular state can trigger physical nexus.

Economic Nexus

Economic nexus is established when a company exceeds revenue or transaction thresholds in a state, regardless of physical presence. This became the standard framework after the 2018 Supreme Court decision in South Dakota v. Wayfair, which has made expanding across the U.S. more difficult for 77% of midsize businesses. Most states have adopted economic nexus rules since then, with 15 states eliminating the 200-transaction threshold as of July 2025.

Local Jurisdiction Taxes on SaaS Products

Do cities and counties impose separate SaaS taxes? Beyond state-level taxes, some local jurisdictions impose additional taxes on SaaS products. This adds another layer of complexity because local rules may differ from state-level treatment.

Chicago Personal Property Lease Transaction Tax

Chicago imposes a 9% Personal Property Lease Transaction Tax on certain cloud-based services and SaaS products used by customers in the city. This tax applies regardless of where the vendor is located—what matters is the customer’s location.

Colorado Home Rule Cities

Colorado has dozens of home rule cities that administer their own sales tax independently from the state. Denver, for example, imposes a separate tax on SaaS. Companies may need to register and remit taxes to individual cities rather than through a single state filing.

Louisiana Parish-Level Tax Variability

Louisiana parishes set their own rates and rules, creating varying taxability for SaaS across the state. Some parishes may tax cloud-based software while others do not, even when the state-level treatment is unclear.

How to Collect and Remit SaaS Sales Tax

What steps does a SaaS company take to comply with sales tax requirements? Compliance involves a sequential process that begins with understanding where obligations exist and ends with timely filing and payment.

1. Determine Where You Have Nexus

First, identify all states where you have physical or economic nexus. This requires reviewing employee locations, sales volume by state, and transaction counts against each state’s thresholds.

2. Register for Sales Tax Permits

Next, register with each state’s tax authority before collecting tax. Collecting sales tax without a valid permit is illegal in most states and can result in penalties.

3. Configure Tax Collection in Your Billing System

Then, set up your billing system to calculate the correct tax rate based on customer location and product taxability.
Modern subscription billing platforms integrate with tax calculation services like Avalara or Anrok to automate this process.

4. File and Remit Sales Tax on Schedule

Finally, file returns and remit collected taxes by each state’s deadlines. Filing frequency—monthly, quarterly, or annually—depends on sales volume in each state.

Sales Tax Exemptions for SaaS Products

When can SaaS sales be exempt from sales tax? Even in states where SaaS is generally taxable, certain transactions may qualify for exemptions.

Business-to-Business Exemptions

Some states exempt SaaS sold to businesses for use in their operations, particularly when the software is used to produce goods or services for resale.

Resale Certificate Exemptions

Customers who purchase SaaS to resell—such as managed service providers or resellers—can provide resale certificates to purchase tax-free. Sellers collect and validate these certificates to support the exemption.

Nonprofit and Government Exemptions

Sales to qualified nonprofit organizations and government entities are often exempt. Sellers obtain and retain exemption certificates to document these transactions.

Penalties for Not Collecting SaaS Sales Tax

What happens if a SaaS company fails to collect required sales tax? Non-compliance exposes companies to financial and legal consequences that compound over time.

Back Taxes and Interest

States can assess uncollected taxes going back several years—lookback periods typically range from three to seven years. Interest accrues on unpaid amounts from the original due date.

Fines and Civil Penalties

States impose penalties for failure to file, failure to pay, and negligence. Penalties are generally around 30% of the underpaid sales tax or flat amounts per violation.

Audit Exposure and Liability

Non-compliant companies face higher audit risk. In an audit, the burden falls on the company to prove taxes were correctly collected and remitted.

How Sales Tax Compliance Affects SaaS Business Valuation

Why do investors and acquirers care about sales tax compliance? During due diligence for funding rounds or acquisitions, buyers assess sales tax exposure as a potential liability. Uncollected taxes can reduce purchase price or require escrow holdbacks.

Best Practices for SaaS Sales Tax Compliance

How can SaaS companies stay compliant as they scale? Several practices help companies manage the complexity of multi-state sales tax obligations:

How to Automate Sales Tax Collection for SaaS

What tools help SaaS companies automate sales tax? Manual compliance becomes unmanageable as companies scale across states. Automation addresses the key pain points.

Simplify SaaS Billing and Tax Compliance with Ordway

Managing sales tax compliance alongside complex subscription billing creates operational burden for growing SaaS companies. Ordway’s subscription billing platform integrates with leading tax automation tools to calculate, collect, and report sales tax across jurisdictions.