Sales tax on software, SaaS and digital products

Software and digital products cross every state line from day one, and states have reached very different conclusions about taxing them. This guide explains the categories, the main patterns, and how SaaS companies should approach compliance.

By Mirza Fahad Baig, Chartered Accountant. Reviewed by Awais Jameel, Chartered Accountant. Checked against official sources on . 3 minute read.

Short answer

Sales tax on SaaS depends on the state. New York, Pennsylvania, Washington and Massachusetts are among those that tax it, Texas taxes 80% of the charge, and some states tax it only for business or only for personal use. Others, including California, Florida, Georgia and Virginia, generally do not. Downloaded software and digital goods are taxed in many states.

At a glance

Tax SaaS, examples
New York, Pennsylvania, Washington, Massachusetts
Texas
Taxes 80% of the charge
Generally exempt, examples
California, Florida, Georgia, Virginia
Downloaded software
Taxable in most states
Digital goods
Taxed in many states
Sourcing
Usually where the user is
Sales tax on software, SaaS and digital productsTax SaaS, examples: New York, Pennsylvania, Washington, Massachusetts; Texas: Taxes 80% of the charge; Generally exempt, examples: California, Florida, Georgia, Virginia; Downloaded software: Taxable in most states; Digital goods: Taxed in many states; Sourcing: Usually where the user is.KEY FACTS AT A GLANCESales tax on software, SaaS and digital productsTax SaaS, examplesNew York, Pennsylvania,Washington, MassachusettsTexasTaxes 80% of the chargeGenerally exempt, examplesCalifornia, Florida,Georgia, VirginiaDownloaded softwareTaxable in most statesDigital goodsTaxed in many statesSourcingUsually where the user isChecked against official sourcesTax BakersSales tax on software, SaaS and digital productsTax SaaS, examples: New York, Pennsylvania, Washington, Massachusetts; Texas: Taxes 80% of the charge; Generally exempt, examples: California, Florida, Georgia, Virginia; Downloaded software: Taxable in most states; Digital goods: Taxed in many states; Sourcing: Usually where the user is.KEY FACTS AT A GLANCESales tax on software, SaaS anddigital productsTax SaaS, examplesNew York, Pennsylvania, Washington,MassachusettsTexasTaxes 80% of the chargeGenerally exempt, examplesCalifornia, Florida, Georgia, VirginiaDownloaded softwareTaxable in most statesDigital goodsTaxed in many statesSourcingUsually where the user isChecked against official sourcesTax Bakers
Key facts at a glance, as set out in this guide.

What categories do states use?

ProductUsual treatment
Prewritten software on physical mediaTaxable almost everywhere
Prewritten software downloadedTaxable in most states
Software as a service, accessed onlineTaxable in some states, exempt in others
Custom software written for one customerOften exempt as a service
Digital goods: e-books, music, video, downloadsTaxable in many states

Definitions matter: a state may treat the same product as software, a digital good, a data processing service or an information service, each with different rules.

Hardware sold with software, such as a device with a subscription, is usually split, with the device taxed as goods.

Which states tax SaaS?

New York, Pennsylvania, Washington and Massachusetts are among the states that generally tax SaaS. Texas treats it as a data processing service and taxes 80% of the charge. Connecticut taxes it at a reduced rate for business use, and some states tax it only for personal or only for business use. California, Florida, Georgia and Virginia are among those that generally do not, though cities can differ, as in Chicago. The list changes as states legislate, so check current rules for each state where you have customers.

Some states also distinguish between SaaS used by businesses and by consumers, or between software and the data or information it delivers.

How should a SaaS business approach it?

  1. Track revenue by customer state

    Billing address, or where users are located.

  2. Monitor economic nexus

    Some states count all revenue, taxable or not, toward the threshold. See economic nexus.

  3. Check taxability in each nexus state

    For your product's category.

  4. Register and collect

    Where taxable and you have nexus.

  5. Collect exemption certificates

    From exempt or reselling customers.

How are multi-state users handled?

When a business customer's users are in several states, some states allow the charge to be apportioned by where users are, often with a customer statement. Without one, the billing or primary address is usually used.

Keep the customer's statement of user locations with your records, as states may ask for it on audit.

For consumer subscriptions, the billing address is usually the location used.

What about bundled services?

A subscription that bundles taxable software with exempt services, such as consulting or training, may be taxed in full unless the parts are separately stated. Separate them on invoices. See sales tax on services.

Free trials and discounts reduce the taxable amount where tax applies, since tax is charged on what the customer actually pays.

What does an example look like?

A SaaS company in California sells $1.2 million of subscriptions across the US, including $180,000 to customers in New York, $150,000 in Texas and $90,000 in Florida. It has economic nexus in all three. It must register and collect in New York, where SaaS is taxable, and in Texas, where 80% of the charge is taxed, but generally has nothing to collect in Florida. California does not generally tax SaaS either.

What about app stores?

App stores and other marketplaces that sell apps and digital products for developers usually act as marketplace facilitators, collecting sales tax on those sales in states that tax them. Developers selling only through such stores often have no sales tax to collect themselves. See marketplace facilitator laws.

What are the common mistakes?

  • Assuming SaaS is never taxed because it is a service.
  • Ignoring nexus because most revenue is in non-taxing states.
  • Billing taxable software and exempt services as one undivided price.
  • Not collecting exemption certificates from business customers that qualify.

What about customers outside the US?

US sales tax does not apply to sales to customers abroad, but many countries charge VAT or GST on digital services sold to their consumers. See taxes for online course creators for how VAT on digital services works.

Selling software or digital products?

We map which states tax your product, monitor your nexus thresholds, and handle registration and returns.

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Questions people ask

Is SaaS subject to sales tax?

In some states. New York, Pennsylvania, Washington and Massachusetts generally tax it; California, Florida, Georgia and Virginia generally do not.

How does Texas tax SaaS?

As a data processing service, taxing 80% of the charge.

Are digital downloads taxable?

In many states, including downloaded software, e-books and music.

Where is SaaS taxed when users are in several states?

Some states allow apportionment by user location; otherwise the billing or primary address is usually used.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. Texas Comptroller: data processing services
  2. New York State Department of Taxation and Finance: computer software
  3. Washington Department of Revenue: digital products

Rules and fees change. If you are reading this long after October 1, 2026, confirm the figures with the source before you rely on them.

Sales tax basicsEconomic nexus explained: when out-of-state sales create a tax dutySales tax basicsSales tax on services: which states tax themSales tax basicsHow US sales tax works: a guide for small businesses

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This guide is general information. It is not tax or legal advice for your situation.