SaaS and other technology companies might be subject to sales tax, even if they never sell a physical product. Many states tax software, digital products, and certain technology services, but the rules vary widely. A subscription might be taxable in one state, exempt in another, and subject to a separate city tax somewhere else.
Usually, the customer pays the tax, and the seller collects and remits it. But if your company should have collected tax and did not, you may have to cover the liability, interest, and penalties.
Clearly, this can get complicated and expensive. Let’s explore what founders and finance teams need to know for 2026 and 2027.
What is sales tax, and how does it apply to technology companies?
You are probably trying to answer two questions: Do you need to collect and remit sales tax, and where? State nexus rules, local taxes, and differences between prewritten software, custom software, and technology services make the answer complicated.
A brief history of sales tax and digital products
Sales tax is imposed by state and local governments on certain goods and services. Most states primarily tax tangible personal property, then identify additional taxable services or digital products.
Five states do not impose a broad statewide sales tax. They are sometimes called the NOMAD states: New Hampshire, Oregon, Montana, Alaska, and Delaware. Alaska allows local sales taxes.
Sales tax treatment varies by jurisdiction and depends largely on the type of product or service being sold. Technology companies may sell apps, APIs, data products, cloud infrastructure, hosting, custom development, support, or other services. Each revenue stream may receive different treatment and be subject to different tax rules depending on the jurisdiction.
For a broader look at the financial issues that come with a subscription model, see our guide to bookkeeping basics for SaaS companies.
Sales tax on software and technology services
Decades ago, applying sales tax to software was fairly straightforward. A customer bought a physical disk or CD-ROM, so the software was delivered through tangible property.
Cloud delivery changed that analysis. A customer might now download software, access it through a browser, use it through an app, or connect through an API. States have responded with different classifications, including prewritten software, digital products, digital automated services, data processing, information services, and computer services.
Those terms are not interchangeable. A state may tax remotely accessed prewritten software but exempt custom software. Another may tax data processing or IT support.
What you call the product or service on your website or invoice does not determine whether it is taxable. Taxability generally depends on what the customer receives, how the product works, who uses it, and how the jurisdiction defines the transaction.
Bundling software and services for one price can also change the result. A subscription may be treated differently from a one-time implementation project, separately billed support, or hardware packaged with software. Finance teams should avoid assigning one tax code across the full product catalog without reviewing what each line item represents.
Sales tax for early-stage startups
If your startup is not yet profitable, you might think sales tax is something to address later. But profitability generally does not determine whether you have a collection obligation.
The more important questions are whether your company has nexus in a jurisdiction and whether that jurisdiction taxes what you sell.
Waiting can leave you covering uncollected tax, contacting customers about older invoices, or pursuing a remediation process. Interest and penalties may also apply.
Registration and collection are separate steps. Generally, register with the applicable tax authority before collecting its tax. State requirements also differ on when remote sellers must register and begin collecting after crossing a threshold.
Sales tax can also surface during financing, diligence, or an acquisition. Investors and buyers may ask where the company has nexus, whether it registered on time, and whether historical exposure has been quantified. Addressing the issue before diligence can make those conversations easier and reduce last-minute remediation.
Our SaaS sales tax compliance checklist walks through nexus, registration, collection, exemptions, and filing in more detail.
Location-based sales tax: State-by-state requirements
Each state approaches software and technology services differently, so a static list of “taxable SaaS states” can quickly become misleading.
States may classify SaaS as prewritten software, distinguish between business and individual use, or focus on how the customer accesses the product. Local rules may differ again. The Multistate Tax Commission has cautioned that a definitive snapshot of digital-product taxation is difficult because state definitions, products, exemptions, and sourcing rules continue to change.
New York and Texas are two useful examples. Both commonly tax SaaS, but their rules, thresholds, sourcing methods, and available exemptions differ. We cover those states separately in our guides to SaaS sales tax in New York and SaaS sales tax in Texas.
The best approach is to review your actual product, contract, customer type, user locations, and revenue in each jurisdiction.
Important changes for 2025 through 2027
Several recent developments are especially important for technology companies.
Louisiana: Beginning January 1, 2025, Louisiana expanded state and local sales and use tax to digital products, prewritten computer access services, and information services. Certain exemptions may apply.
Maryland: Beginning July 1, 2025, Maryland imposed a 3% tax on a range of data, information technology, computer systems, and software publishing services. SaaS sold for individual use is generally taxed at 6%, while qualifying enterprise or commercial use is generally taxed at 3%. This replaces the older treatment under which some commercial SaaS was exempt.
Washington: Beginning October 1, 2025, Washington expanded retail sales tax to services including custom software, customization, implementation, data processing, technical support, and other IT work. This matters to companies selling services alongside software.
Chicago: Chicago separately taxes certain nonpossessory computer leases, a category that can be relevant to SaaS and cloud services. The city increased its Personal Property Lease Transaction Tax rate to 15% on January 1, 2026.
California: Beginning January 1, 2027, prewritten software transferred electronically or accessed remotely will generally enter the sales and use tax base, subject to exclusions and exemptions. Custom software and certain digital infrastructure services may receive different treatment. Companies should watch for additional implementation guidance.
Colorado: Colorado is also changing its software rules beginning January 1, 2027. The state’s revised treatment reaches software delivered through remote access, while preserving limited exceptions for software developed for a particular user and software governed by a qualifying negotiable license agreement.
These changes show why companies should revisit earlier conclusions. A product that was not taxable at launch may become taxable later.
Sales taxation based on B2B or B2C use
Customer type can affect taxability, but there is no nationwide B2B or B2C rule.
In Ohio, certain automatic data processing, computer, and electronic information services are taxable when purchased for use in business. The exact result still depends on what the customer is buying and the primary purpose of the transaction.
Iowa generally taxes specified digital products and software, but a qualifying commercial enterprise may claim an exemption when it purchases and exclusively uses the product for a commercial purpose.
Maryland now considers the customer type and intended use of the software when determining the applicable tax rate. Qualifying enterprise or commercial SaaS is generally taxed at 3%, while individual-use SaaS is generally taxed at 6%.
These examples show why “B2B” or “B2C” should be treated as one part of the analysis, not the final answer.
Local sales tax for SaaS
Local rules can be easy to miss. Alaska allows local sales taxes even though it has no statewide sales tax. Chicago applies its own tax to certain nonpossessory computer leases. Colorado’s home-rule jurisdictions can also create additional complexity.
A city may also use its own definition, registration process, sourcing rule, or filing requirement.
What nexus means after the Wayfair ruling
Unfortunately, your sales tax obligations are not limited to the states where your company has an office.
Nexus means your business has enough connection with a jurisdiction for that jurisdiction’s tax rules to apply. A physical presence may come from an office, employee, inventory, property, or certain contractor activity.
That means a remote employee can matter. Our article on how remote employees affect tax nexus explains why hiring or allowing employees to relocate may create obligations beyond payroll.
Economic nexus adds another layer. In the 2018 South Dakota v. Wayfair, Inc. decision, the U.S. Supreme Court rejected the rule that generally required physical presence before a state could require a remote seller to collect sales tax.
The South Dakota law reviewed in Wayfair used thresholds of more than $100,000 in sales or at least 200 transactions. Although these numbers became widely associated with economic nexus, they are not a nationwide standard.
Each state sets its own threshold and may measure gross, retail, or taxable sales. Some include transaction counts; others have removed them. What counts toward the threshold and when collection must begin also varies.
It is also important to separate nexus from taxability. Crossing an economic nexus threshold does not automatically mean every sale is taxable. It means your company needs to determine whether registration, collection, exemption documentation, and filing requirements apply.
Customer location and multiple points of use
For SaaS, the customer’s billing address does not always determine where tax applies.
Some states source remotely accessed software to where the customer’s users access it. For distributed teams, the charge may need to be allocated using seats, licenses, employees, or another reasonable method. A billing address may not be enough.
Local and global sales tax considerations
Many states allow cities and counties to add local sales tax. Internationally, a SaaS or technology company may also encounter value-added tax (VAT), goods and services tax (GST), or similar consumption taxes.
Those rules should be reviewed separately because registration thresholds, customer-status rules, invoicing, and marketplace provisions vary by country. International VAT and GST systems generally follow destination-based principles for cross-border services and intangible products.
This is part of the broader compliance work that comes with entering a new market. As we discuss in our article on supporting international technology companies expanding into the U.S., it is easier to build the right foundation before problems become urgent.
What SaaS and technology companies should do next
Start by documenting each revenue stream, including subscriptions, apps, APIs, custom development, implementation, data services, hosting, support, and hardware.
Then map your employees, contractors, property, customers, and sales by jurisdiction. Classify each offering, review customer and user locations, check exemptions, and identify bundled charges.
Once you identify an obligation, register before collecting tax. Configure your systems, retain exemption documentation, file on schedule, and reconcile tax collected to tax remitted. Revisit the analysis as products, pricing, locations, and laws change.
Sales tax for SaaS and technology companies is not simply a matter of switching on a rate. You need to know where your company has nexus, how each jurisdiction classifies what you sell, where customers use it, and which exemptions or local rules may apply.
Addressing those questions early can help your company avoid funding customer taxes from its own cash and build a compliance process that scales with the business.
Need help evaluating your sales tax obligations? Reach out to Shay CPA to discuss your products, customer footprint, and compliance process.
Disclaimer:
The content provided on this blog is for general informational purposes only and does not constitute professional accounting, tax, or legal advice. Reading or accessing this material does not create a CPA-client relationship, nor should it be construed as a substitute for individualized guidance from a qualified professional. While we strive for accuracy, Shay CPA PC makes no warranties—express or implied—about the completeness, reliability, or timeliness of the information, and we expressly disclaim liability for any errors or omissions. You should not act or refrain from acting based on any blog content without seeking the advice of a qualified CPA or other professional who can address your specific circumstances. Links to external resources are provided for convenience only and do not imply endorsement. Shay CPA PC is under no obligation to update this content and disclaims responsibility for decisions made in reliance on it.
