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Taxability Of SaaS In Arizona, District Of Columbia, Iowa, Mississippi, Rhode Island And Tennessee



Taxability Of SaaS In Arizona, District Of Columbia, Iowa, Mississippi, Rhode Island And Tennessee

We recently posted an article about the challenges of SaaS taxability and discussed the reasons why SaaS is a particularly sticky subject, tax-wise.

While there are a number of reasons for it, the complexity largely boils down to irregularities in SaaS definitions between states, little uniformity when it comes to SaaS tax legislation and complication brought about by the very nature of the product (is it a “software” or a “service?”). Economic nexus adds an additional layer of difficulty.

Now, we’d like to give you an in depth look at SaaS taxability in 6 more states.

1. Taxability of SaaS in Arizona
Economic Nexus Provisions: Yes

As of 2020, remote companies that make $150,000 in gross sales of tangible personal property or services will trigger Arizona’s economic nexus. Sales made through a marketplace are not included. Starting January 1, 2021, the threshold will lower to $100,000.

SaaS and Cloud Computing Tax Rules: Taxable

Arizona does impose sales and use tax on SaaS and cloud computing. Prewritten computer software or “canned software,” which includes software that may have originally been written for one specific customer but becomes available to others, are also taxable and considered sales of tangible personal property.

Electronically Downloaded Software Treatment: Taxable

Arizona provisions on electronically downloaded software include canned or prewritten software, but custom software is exempt. Customization of canned software is also exempt when the customization is separately stated on the sales invoice.

SaaS and Cloud Computing vs. Electronically Downloaded Software

In a private letter ruling, Arizona defines SaaS as a model in which vendors host software applications and customers access it through the internet. Specifically, in Arizona, SaaS products are leased or paid for on a subscription basis and are then subject to sales and use tax.

2. Taxability of SaaS in the District of Columbia
Economic Nexus Provisions: Yes

As of January 1, 2019, the District of Columbia requires out-of-district retailers with more than $100,000 in gross receipts, or 200 or more transactions into the district, to collect and remit sales tax.

SaaS and Cloud Computing Tax Rules: Taxable

SaaS and cloud computing products are generally subject to sales and use tax in the District of Columbia. Regulations specify system software, application software, computer programming, software modification and software updating are all subject to taxation.

Electronically Downloaded Software Treatment: Taxable

While prepacked and custom software have been taxable in the District of Columbia for some time, emergency legislation passed in 2018, expanded digital sales taxes and gives guidelines that all electronically or digitally delivered, streamed or otherwise accessed digital products are subject to sales and use tax.

SaaS and Cloud Computing vs. Electronically Downloaded Software

The District of Columbia specifies all digital goods, including software, regardless of the method of delivery, are subject to sales and use tax.

3. Taxability of SaaS in Iowa
Economic Nexus Provisions: Yes

Starting January 1, 2019, Iowa requires out-of-state retailers that make $100,000 or more in gross revenue from sales in the state to collect and remit sales tax. Previously, the state also included guidance that economic nexus could be triggered by transaction volume, but that guidance was removed in July 2019.

SaaS and Cloud Computing Tax Rules: Taxable

Iowa does impose sales and use tax on SaaS, cloud-based services or hosting services. However, commercial enterprises are exempt from sales and use tax for prewritten computer software, SaaS and storage of tangible or electronic files when the products are used exclusively or furnished for that enterprise. Additionally, digital products are exempt from sales tax when sold to a “non-end user,” or a person who receives products for redistribution. Other entity-based exemptions are also available.

Electronically Downloaded Software Treatment: Taxable

Starting January 1, 2019, prewritten computer software is subject to sales tax when downloaded electronically, in addition to previous regulations that software was to be taxed when delivered via tangible medium.

Custom software is now subject to the same tax regulations as prewritten software.

SaaS and Cloud Computing vs. Electronically Downloaded Software

SaaS and cloud computing are generally subject to tax, though exceptions are made for commercial enterprises and specific entities. Starting January 1, 2019, specified digital products transferred electronically, including computer software applications, are subject to sales tax.

4. Taxability of SaaS in Mississippi
Economic Nexus Provisions: Yes

Starting September 1, 2018, sales made into the state by remote sellers that are “purposefully or systematically exploiting the Mississippi market” and whose sales exceed $250,000 are required to collect and remit sales tax.

SaaS and Cloud Computing Tax Rules: Taxable

SaaS and cloud computing can generally be considered taxable in Mississippi. While there are no specific provisions that define SaaS, “computer program or software sales and services” are taxable at the regular retail rate of sales tax. Computer program license fees or maintenance contracts are also taxable.

Electronically Downloaded Software Treatment: Taxable

The definition of “computer programs” include those that are downloaded via the internet, which includes SaaS, canned and customer software and other digital products.

SaaS and Cloud Computing vs. Electronically Downloaded Software

The broad reach of Mississippi tax language and lack of specific definitions means that SaaS, cloud computing and electronically downloaded software are generally considered taxable under the same regulations.

5. Taxability of SaaS in Rhode Island
Economic Nexus Provisions: Yes

Starting July 1, 2019, out-of-state retailers with $100,000 in sales or 200 transactions are required to collect and remit sales tax. The gross revenue from sales of tangible personal property, prewritten computer software delivered electronically or by load and leave, vendor-hosted prewritten computer software and specified digital products are all applicable transactions.

SaaS and Cloud Computing Tax Rules: Taxable

As of October 1, 2018, SaaS and cloud computing are taxable in Rhode Island. Specifically, taxes apply to the “sale, storage, use or other consumption of vendor-hosted prewritten computer software.” Custom software and customization of prewritten computer software are exempt.

Electronically Downloaded Software Treatment: Taxable

Prewritten computer software delivered electronically or by load and leave has been taxable under Rhode Island tax law since 2011.

SaaS and Cloud Computing vs. Electronically Downloaded Software

Rhode Island tax law specifies that vendor-hosted prewritten software, whether downloaded or not, is subject to tax.

6. Taxability of SaaS in Tennessee
Economic Nexus Provisions:

As of July 1, 2019, out-of-state retailers with $500,000 or more in sales made within Tennessee are required to collect and remit sales tax. Starting October 1, 2020, the threshold will lower to $100,000.

SaaS and Cloud Computing Tax Rules: Taxable

In Rhode Island, SaaS and cloud computing are considered taxable as of July 1, 2015, as part of the Revenue Modernization Act. The act specifies that it applies to amounts charged for the remote access and use of software, which remains in the seller’s possession, when the purchaser accesses the software within Tennessee.

Electronically Downloaded Software Treatment: Taxable

Prewritten and custom software are both taxable in Tennessee, whether provided via tangible storage medium or electronically downloaded.

SaaS and Cloud Computing vs. Electronically Downloaded Software

In Tennessee, SaaS is defined as software that remains in the possession of the seller but is made available to the customer from a remote location. This means that SaaS is taxable independently of electronically downloaded software, even though both are taxable within Tennessee.

Do You Have Questions About SaaS Tax Compliance?

Contact Monika Miles And Team

Monika Miles

Monika founded Miles Consulting Group which focuses on multi-state tax consulting, helping clients navigate state tax issues such as sales tax and income tax in interstate commerce, including e-commerce.

Prior to forming the firm, Monika worked for 12 years combined in Big 4 Public Accounting and private industry. Monika has provided such services as federal and state income/franchise tax compliance and consulting, sales/use tax consulting, audit support, and credits and incentives reviews. She has served clients in a variety of industries including manufacturing, technology, telecommunications, construction, utility, retail and financial institutions.

Monika graduated from the University of Texas at El Paso (UTEP) with a BBA in Accounting/Finance and has a Masters in Taxation from San Jose State University.

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