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The Challenges Of SaaS Taxability And Why You Should Care

Even without considering the ramifications of the 2018 Wayfair decision, the taxability of software-as-a-service (SaaS) products is complicated. With Wayfair thrown in, it just gets worse.

But why is it so complicated? More importantly, how are SaaS companies supposed to be able to comply with tax laws when they can barely keep on top of them?

A large portion of it comes down to irregularities in SaaS definitions between states, in addition to little uniformity when it comes to SaaS tax legislation. The very nature of the product (is it “software” or “service”) adds to complexity. Over 20 states now assess sales tax on the SaaS revenue stream, but for different reasons.

Why Are SaaS Taxes So Complicated?
In addition to occasionally differing definitions, the laws built on top of those definitions are also different state to state. For example, in New York, all canned or prewritten computer software is considered tangible personal property, and is thus taxable. In others, like Nevada, SaaS is taxable, but only when used for business purposes. Texas classifies SaaS as information services and assesses tax on 80% of the cost (rather than 100%).
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Written by Monika Miles | Posted in SaaS Taxability • Sales And Use Tax

When it comes to Software-as-a-Service (SaaS) companies, there’s often confusion regarding both nexus and the taxability of this revenue stream.

And while the Wayfair decision seems like it’s directed only at online sellers, traditional multi-state sellers (including those that generate revenue from SaaS and software) are also affected, as nexus is now easier to establish. Once it is established – either by traditional physical presence or by sales volume – then companies will need to consider the taxability rules of SaaS in each state in which they have nexus.

Is SaaS even taxable? Because SaaS and cloud computing don’t always clearly fall into existing tax definitions, different states interpret its taxability in different ways. Some regard it as similar to electronically downloaded software, while others consider it a service, which may be taxable or not. And what about electronically downloaded software? Is it treated differently from SaaS?