SaaS Sales Tax: Part III – Taxability

Contributing Author Steven Claflin, Manager SALT (State and Local Tax)

Back to Introduction

Perhaps the most complicated issue for a seller in the technology industry is properly identifying which revenue streams are taxable and in which jurisdictions.  States complicate this determination because most sales tax laws were written before something like Software-as-a-Service existed. While some states have overhauled their statutes to specifically impose tax on things like SAAS, others have not changed their statute but instead bended legal theories to tax software sales.  

While many states have published guidance on the sale of software, the taxability may differ based on a variety of factors, such as:

• Is the software electronically downloaded or accessed via the cloud?
• If accessed via a server, where is the server located?
• Is there a service agreement or software license?
• What level of control over the software does the user have?

Further, additional related services such as training, implementation, consulting, etc., may or may not be taxable depending on the jurisdiction.

Finally, states still struggle with how to classify software-as-a-service (“SAAS”) for sales tax purposes. However, for the most part, states are clear that they want to tax these revenue streams, using different theories of taxation such as:

• Computer software is taxable, regardless of the method of delivery, which includes access via the cloud.  
• Accessing software over the internet constitutes constructive possession by the user.  
• Defined as a taxable service (“Software as a service”).  
• Interpreted to qualify as a taxable service (transmission of information). 
• Interpreted to qualify as a taxable service (telecommunication service).

Now, what’s next? Keep reading —> SaaS Sales Tax Part IV – Compliance