Is SaaS Subject to Sales Tax?

First, it is worth outlining from a technology perspective what software as a service (“SaaS”) is. SaaS is a method of software delivery whereby the software is hosted in one place (on the “server”) and use is permitted by the customer during the payment period and with certain restrictions. You will often read references made to a “software license” for a SaaS product — this is a misnomer. As SaaS contemplates the provision of a service, there is no software being licensed but only a service being rendered.

Next, we need to outline (to the extent we can) what SaaS is from a legal and sales tax perspective. Unfortunately, this is where things get murky. While a SaaS product is indeed a service, and not a piece of tangible software, many states tax authorities have not woken up to that fact — some treat SaaS products as software products like any other. In those states, generally speaking, a SaaS product is considered a tangible good and is therefore subject to state taxation the same way it would be if the software was delivered on a physical disk (Washington state is an example of this treatment).

For those states that do not treat SaaS as a tangible good, the question is whether a service is subject to state taxation. If services are taxable, software as a service is taxable; if services are not, generally software as a service is not.

It can be a difficult task to navigate state tax law. If you have specific questions, I’m here to help. Otherwise, make sure you seek the guidance of an attorney before choosing to not charge sales tax, and don’t leave it up to a Google search.

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