Sales Tax on SaaS by State for a US Software Startup

Which states charge sales tax on SaaS?

There is no single US rule. Some states tax SaaS, others don't, and what your invoice calls the product doesn't decide it: each state applies its own label. California starts taxing software subscriptions on January 1, 2027 and Colorado on January 1, 2027. Separately, physical presence such as an employee or a server in a state can require you to register there before your first taxable sale, with no sales threshold.

Rules checked on each state's site on October 13, 2026. The table is selective: a state not listed, such as Massachusetts or Michigan, needs its own check. States with no statewide sales tax are covered in when you must collect sales tax.

Is our platform SaaS, data processing or an information service?

The state decides, from what the customer actually gets. Roughly: SaaS is using the seller's software over the internet; data processing is the seller's computers storing or working on the customer's data; an information service supplies compiled information or reports. Pennsylvania says a sale does not become untaxed because it is labeled a service (PA DOR).

Three features often change the answer:

• An on-site collector or agent. Monitoring, data center infrastructure management (DCIM) and orchestration platforms often install software at the customer's site. Illinois says a downloaded agent can mean the customer receives taxable software. New York taxes downloaded software, and North Carolina generally does, though it exempts software a data center operator uses in its data center. Wisconsin, by contrast, ignores software that is used only to reach the provider's service.
• A hardware gateway. A physical device is tangible property, generally taxable where you must collect, unless the buyer gives a valid exemption certificate, such as a qualifying data center's.
• Reports, benchmarks or compiled data. These can make the product an information service. New York treated a data-and-reports subscription as an information service; New Jersey and Texas tax information services too.

Pricing the agent, any hardware and any data product as separate lines lets each be classified on its own, which can lower or raise the tax by state. Keep the contract that shows what the customer receives.

Do we charge sales tax in our home state?

Yes, if your product is taxable there. A seller located in a state has physical presence from day one, so no sales threshold applies. Texas requires a sales tax permit if you are engaged in business in Texas and sell taxable services there (Comptroller). An office or any other physical location where business is conducted counts (Tax Code §151.107(a)(1)). Get the permit before your first taxable sale.

Does a remote employee create sales tax nexus?

It can, and no sales threshold protects you. How much presence is enough depends on the state:

• Washington lists "having an employee working in the state" first among activities that create physical presence (DOR).
• New York requires registration if you have a place of business there, or solicit business through employees or other representatives and sell taxable items through them (Tax Department). Whether one engineer working from home, who sells nothing, is enough is not settled by that page. Check before relying on either answer.
• Texas covers any physical location, used directly or indirectly, where business is conducted, and representatives who sell or take orders there (§151.107). Whether an employee's home office counts is not settled by the statute; check before relying on either answer.

Nexus matters for sales tax only where your product is taxable. Payroll and state income tax still follow the employee: see employees in another state and business income tax in other states. The state may also expect you to register the corporation there.

Do servers we own in another state's data center create nexus?

They can. Washington lists having real or tangible personal property in the state as physical presence (DOR). Texas is narrower only for rented capacity: a business whose only activity in Texas is using internet hosting, on property the host owns or leases and manages, is not engaged in business there (Tax Code §151.108). Servers you own in a Texas data center are not covered by that rule. Income, franchise and property tax on those servers are in servers in a data center in another state.

Do SaaS sales count toward a state's economic nexus threshold?

Yes in the states below, though each counts different sales. Texas counts all Texas revenue, taxable or not, against its $500,000 safe harbor (Comptroller). Washington counts gross receipts over $100,000 (DOR). New York counts tangible property, which includes prewritten software, over $500,000 and 100 sales (Tax Department). California's $500,000 test counts tangible property (CDTFA); SaaS becomes tangible property there from January 1, 2027, but CDTFA has not yet said how that affects the test. Other states, marketplace sales and the states with no sales tax: when you must collect sales tax.

When do we register, and when do we start collecting?

With physical presence, register before the first taxable sale. New York says to apply at least 20 days before you begin (Tax Department).

With only economic nexus, each state sets a start date after you cross:

If you sell through a cloud marketplace that collects as a marketplace facilitator, your direct invoices still need your own registration; New York says a marketplace seller that meets a registration test on its own must register and file (Tax Department). Returns after registration: filing sales tax returns. Tax you should already have collected: catching up on uncollected sales tax.

Tax you collect is held in trust for the state. In Texas, an officer, director or employee who controls collecting or paying it and willfully fails to pay it over owes it personally, even after the corporation dissolves (Tax Code §111.016). Other states have similar rules; New York's and Washington's are in the Canadian seller's guide.

One customer has users in several states: which state's tax applies?

Each state taxes its share, by its own method. Ask customers where their users work and keep the answer. Logins a customer gives its own tenants or contractors are not its employees' seats: Pennsylvania treats the customer as the end user for them unless it resells them.

The Canadian seller's guide has the Washington method and more detail.

A customer sent an exemption or resale certificate, or asked for a tax line: what do we do?

Accept a certificate only when it is complete and fits the customer's business. In Texas, a managed service provider reselling your platform gives Form 01-339. You must make sure it is properly completed, question one that doesn't fit the buyer's business, and keep it for 4 years (Comptroller). A customer's permit number alone is not a certificate.

Data center operators may send a data center exemption certificate. Texas Form 01-929 lists software among qualifying items but excludes taxable services performed on exempt property (Form 01-929). Whether a data processing subscription qualifies is not settled in today's sources; without written guidance from the Comptroller, a seller relying on one carries the risk. Certificate mechanics: sales tax on servers, installation and maintenance.

If a customer asks for tax on an invoice in a state where you are not registered, first check whether your product is taxable there and whether you must register. Don't charge tax you are not registered to collect.

Are setup, support and custom work taxed with the subscription?

Sometimes. In the states below, separate, reasonable charges can keep services out of the tax; a bundled price can make all of it taxable.

• New York exempts custom software, and separately stated custom changes, training and support, if reasonable and separately stated (TB-ST-128). North Carolina exempts separately stated custom changes (SUTB 19-3).
• Pennsylvania taxes configuration and support, except separately invoiced help desk support where the vendor does not access the software (PA DOR).
• Washington taxes custom software and IT support, under rules still being challenged in court; sellers must collect meanwhile (DOR).
• Texas taxes a whole bundled bill when the taxable part is more than 5% of it, unless the nontaxable service is distinct, commonly sold on its own and separately billed; records can later show the nontaxable share (Publication 94-127).

California and Colorado start on January 1, 2027: what should we do now?

California. SB 122 makes digital products, including SaaS, tangible personal property from January 1, 2027. Infrastructure and platform services that let customers run their own software are excluded (CDTFA). Custom software and some services that are mainly human effort are exempt; SaaS is not. If your sales of digital products, downloaded or remotely accessed, to one buyer pass $5,000,000 in a calendar year (from 2028, the current or prior year, adjusted for inflation), you can be relieved of the tax and the buyer pays use tax directly using a direct payment certificate. The rule does not apply to insurers. Emergency regulations are still being drafted (CDTFA).

Colorado. HB26-1223 (Session Laws, chapter 379, signed June 4) defines software to include software delivered by remote access through the internet, and taxes it from January 1, 2027. It exempts custom software and software under an individually bargained license agreement signed by both sides; standard, click-through or website terms don't count (session law). The Department of Revenue held a workgroup on rules in August and had published no proposed rule when checked (Colorado DOR).

Neither state has published a rule for an annual subscription billed before the start date for service after it. Now: list customers and user locations in both states, check whether your contracts are signed, negotiated agreements or standard terms, total each buyer's expected California purchases against the threshold, and check whether you must register.

What about Canadian customers?

Canada taxes SaaS sold to businesses differently. Detail: non-resident and digital sellers.

Example

All figures are illustrative, in US dollars. A Series A data center monitoring startup sells DCIM and power monitoring subscriptions to colocation operators and enterprise data center teams in twenty states. It is a Delaware corporation based in Austin, with remote engineers in three states.

Austin home state

A Dallas colocation operator signs a $100,000 annual subscription for use only at its Texas sites. If the platform is data processing, $80,000 is taxable. At the 8.25% combined maximum Texas rate, the tax would be $6,600; the actual local rate applies. The startup holds its Texas permit before its first Texas sale. No threshold applies to a Texas seller.

Remote engineers in three states

• Brooklyn. A sales engineer demos the platform to New York customers. New York lists soliciting business through employees, so the startup registers before selling there, even though its $300,000 of New York sales on 40 invoices is below both remote seller tests.
• Near Seattle. A firmware engineer works from home. That is physical presence in Washington, so the startup collects on its $50,000 of Washington subscriptions, below the $100,000 test.
• Miami. An engineer works there. On Florida's ruling facts, SaaS is untaxed, so there may be nothing to collect. Payroll and Florida income tax still need their own check.

Certificates and users in several states

A managed service provider in Houston resells the platform and gives a complete Texas resale certificate, so no tax is charged to it.

A colocation operator billed at its Philadelphia headquarters buys 100 seats for $240,000 for its own employees; 40 work in Pennsylvania and 60 only in other states. Without REV-1220, Pennsylvania presumes all $240,000 is Pennsylvania use. With it, $96,000 is. Seats given to its tenants or contractors could not be allocated out.

Different for you?

• You also bill hosting, colocation or GPU compute: see sales tax on colocation, hosting and GPU compute.
• You sold into a taxable state for past years without collecting: see catching up on uncollected sales tax.
• Investors are reviewing your sales tax: see tax clean-up before investor due diligence.
• Your seller is a Canadian or other foreign company: see US sales tax on software sold from Canada.
• You owe Washington B&O or another gross receipts tax: see gross receipts taxes in other states. Texas franchise tax: Texas franchise tax.
• Customers prepay annual subscriptions: when that is income is in customer prepayments and deposits.
• Your platform has agents, gateways, data products or customers in many states: classification and registration take judgment. Our CPAs register, file and reconcile sales tax for data center and infrastructure businesses.