Sales Tax for SaaS: A State-by-State Guide

Understanding when and where your SaaS business needs to collect sales tax, how to determine nexus, and how to stay compliant across multiple states.

Last Updated: January 2026|15 min read

Sales tax for SaaS companies is one of the most confusing areas of startup compliance. Is software taxable? Does it depend on the state? What about if you have no physical presence there? The answers are complicated—and getting them wrong can result in significant back taxes, penalties, and interest.

This guide breaks down SaaS sales tax state by state, explains when you need to collect, and provides practical guidance for staying compliant as you scale.

Important Disclaimer

Sales tax rules change frequently and are highly fact-specific. This guide provides general information as of late 2024 but should not be relied upon for compliance decisions. Consult with a sales tax professional or use specialized software for your specific situation.

Is SaaS Taxable?

The short answer: it depends on the state. States take different approaches to taxing SaaS, and there's no national standard. This creates significant complexity for SaaS companies selling across the country.

How States Classify SaaS

States Where SaaS is NOT Taxable

These states generally don't tax SaaS, treating it as a non-taxable service:

California, Colorado, Florida, Georgia, Idaho, Illinois, Indiana, Kansas, Maine, Maryland, Michigan, Missouri, Montana (no sales tax), Nebraska, Nevada, New Hampshire (no sales tax), North Carolina, North Dakota, Oklahoma, Oregon (no sales tax), Virginia, Wisconsin, and others.

States Where SaaS IS Taxable

These states tax SaaS, treating it as tangible personal property or a taxable digital good:

Arizona, Connecticut, Hawaii, Iowa, Louisiana, Massachusetts, Minnesota, Mississippi, New Jersey, New Mexico, New York, Ohio, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Washington, West Virginia, and others.

States With Complicated Rules

Some states have nuanced rules based on factors like whether the software is "canned" vs "custom," whether data processing is involved, or the nature of the transaction. Always verify specific situations with a tax professional.

The Wayfair Decision

In 2018, the Supreme Court's South Dakota v. Wayfair decision changed everything. States can now require out-of-state sellers to collect sales tax based on "economic nexus"—meaning sufficient sales into the state, even without physical presence.

Understanding Sales Tax Nexus

"Nexus" is the legal term for having sufficient connection to a state to trigger tax obligations. For sales tax purposes, there are two types of nexus to understand:

Physical Nexus

Established by physical presence in a state:

- Employees working in the state
- Office, warehouse, or other property
- Inventory stored in the state
- Sales reps or agents
- Trade show attendance (in some states)

Economic Nexus

Established by sales volume into a state:

- Revenue threshold (typically $100K)
- Transaction threshold (typically 200)
- No physical presence required
- Based on prior year or current year
- Thresholds vary by state

Remote Work Complications

The rise of remote work has created new nexus concerns. If you hire a remote employee in a new state, you likely have physical nexus there. Even if SaaS isn't taxable in that state, you may have other obligations (payroll tax registration, state income tax, etc.).

Example: California Remote Employee

You're a Delaware company with headquarters in Texas. You hire a remote engineer in California. Even though California doesn't tax SaaS, you now have:

- California payroll tax obligations
- Potential California corporate income tax exposure
- Workers' compensation requirements

State-by-State Overview

Below is a summary of SaaS taxability in major states. Note that rules change frequently—always verify current status before making compliance decisions.

State	SaaS Taxable?	Rate	Notes
California	No	N/A	Treated as non-taxable service
New York	Yes	4-8.875%	Varies by locality; NYC highest
Texas	Yes	6.25-8.25%	Data processing services taxable
Florida	No	N/A	Not taxable as of current rules
Washington	Yes	6.5-10.5%	Also subject to B&O tax
Massachusetts	Yes	6.25%	Taxed since 2019
Pennsylvania	Yes	6%	Canned software is taxable
Colorado	No	N/A	Not taxable at state level
Connecticut	Yes	1%	Reduced rate for SaaS specifically
Ohio	Yes	5.75-8%	Treated as automated data processing

B2B vs. B2C

Some states have exemptions for B2B SaaS transactions, or for specific industries. If you're primarily selling to businesses, check if resale exemption certificates or specific industry exemptions apply in your target states.

Economic Nexus Thresholds

Even without physical presence, you may have sales tax obligations based on your sales volume into a state. Most states have adopted thresholds following the Wayfair model.

Common Thresholds

Threshold Type	Amount	States Using This
$100K or 200 transactions	Either threshold triggers nexus	Many states (original Wayfair model)
$100K only	No transaction count	CA, TX, NY, FL, and growing
$500K	Higher threshold	TX (for certain sellers)
Lower thresholds	$10K-$50K	A few smaller states

Important Considerations

Gross vs. taxable sales: Some states measure against total sales into the state; others only count taxable sales. This matters if SaaS is exempt in that state.
Prior vs. current year: Thresholds may apply to the prior year, current year, or either. Check each state's rules.
Transaction count dropping: Many states have dropped the transaction count threshold, focusing only on dollar amounts.
Marketplace facilitator rules: If you sell through marketplaces, the marketplace may handle sales tax collection for you.

Calculating and Collecting

Once you've determined you have nexus in a state where SaaS is taxable, you need to calculate the correct rate and collect tax from customers.

Sourcing Rules

"Sourcing" determines which jurisdiction's rate applies. For SaaS:

Destination-Based (Most States)

Tax is based on where the customer is located (their billing address). This is the majority approach and aligns with where the service is "consumed."

Origin-Based (Minority)

Tax is based on your location. States like Texas, Arizona, and a few others use this approach for some transactions.

Rate Complexity

Sales tax rates aren't just state-level. You may need to account for:

State tax: The base rate (e.g., California 7.25%)
County tax: Additional county surcharges
City/local tax: Municipal taxes
Special district tax: Transit districts, stadium taxes, etc.

This means there are over 10,000 unique tax jurisdictions in the US. For a customer in Los Angeles, you might need to apply state + county + city + special district rates.

Don't Calculate Manually

Manually tracking 10,000+ jurisdictions is impossible. Use automated sales tax software (more on this below) that maintains rate databases and updates them as rates change.

Compliance Process

Here's the typical process for sales tax compliance:

Determine Nexus

Analyze where you have physical presence and track sales by state to identify economic nexus thresholds. Reassess regularly as you hire and grow.

Register for Sales Tax Permits

Register in each state where you have nexus and SaaS is taxable. Some states offer streamlined registration through the Streamlined Sales Tax program.

Configure Your Systems

Implement sales tax calculation in your billing system. Integrate with tax calculation software or use your payment processor's built-in tools.

Collect Tax on Invoices

Add sales tax as a line item on customer invoices. Tax should be clearly identified and collected from the customer.

File Returns

File sales tax returns (monthly, quarterly, or annually depending on volume). Remit the tax collected to each state.

Maintain Records

Keep records of all transactions, exemption certificates, and filings. States can audit going back 3-7 years.

Exemption Certificates

Some customers may be exempt from sales tax:

Resellers: Businesses purchasing for resale can provide resale certificates
Non-profits: Qualifying tax-exempt organizations
Government: Federal, state, and local government entities
Specific industries: Some states exempt certain industries (manufacturing, agriculture)

Always collect and store exemption certificates from exempt customers. If audited, you'll need to prove the exemption was valid.

Tools and Services

Manual sales tax compliance is impractical for most SaaS companies. Here are the main categories of solutions:

Sales Tax Software (Calculation + Filing)

$50-$500+/month

Full-service platforms that calculate tax, manage exemptions, and file returns.

Examples: Avalara, TaxJar, Vertex, Sovos

Payment Processor Built-In

Often included or low fee

Stripe Tax, Paddle, and other billing platforms include sales tax features.

Examples: Stripe Tax, Paddle, FastSpring

Merchant of Record (MoR)

% of revenue

The MoR handles all tax obligations as the legal seller. You avoid sales tax entirely by having them be the seller of record.

Examples: Paddle, FastSpring, Gumroad

Tax Consultants

Project or retainer

CPAs or sales tax specialists for nexus studies, registration, and strategy.

When to use: Initial setup, complex situations, audits

Early-Stage Recommendation

For early-stage SaaS companies, we typically recommend starting with Stripe Tax (if using Stripe) or a Merchant of Record model. As you grow, evaluate whether dedicated sales tax software like TaxJar or Avalara makes sense for your volume and complexity.

Common Mistakes

Avoid these common sales tax mistakes:

Ignoring Sales Tax Entirely

Many startups don't think about sales tax until they're significant. By then, they may owe years of back taxes, penalties, and interest.

Not Tracking Nexus

Every new hire, every new state with significant sales creates potential nexus. Track this proactively rather than discovering it during an audit.

Using Wrong Rates

Applying state-level rates only and missing local taxes. Use automated tools that account for all applicable jurisdictions.

Not Collecting Exemption Certificates

If a customer claims exemption, get the certificate upfront and store it. Without documentation, you're liable for the tax in an audit.

Assuming Non-Taxable Everywhere

Just because California doesn't tax SaaS doesn't mean Texas doesn't. Evaluate each state individually based on your nexus.

Voluntary Disclosure

If you've been operating without collecting sales tax, most states offer voluntary disclosure programs. These programs typically reduce or eliminate penalties and limit look-back periods. It's almost always better to come forward than to be discovered in an audit.

Need Help With Sales Tax Compliance?

Eagle Rock CFO can help you understand your sales tax obligations, select the right tools, and implement compliant processes.

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