Key Takeaways

• Taxability and collection duty are separate tests. A subscription can be taxable in a state where you owe nothing, because you haven't crossed its nexus threshold.

• States split on whether remote software access is a good or a service. New York taxes a license to remotely access software; Virginia and Georgia exempt it.

• Texas taxes SaaS as a data processing service and exempts 20 percent of the charge under Tax Code 151.351, so tax lands on 80 percent.

• South Dakota v. Wayfair, decided 21 June 2018 by a 5-4 vote, killed the physical presence rule and let states reach sellers with no office or staff there.

• Most thresholds sit at $100,000 in sales, but New York, Texas, and California use $500,000. Ohio taxes SaaS only for business use, so the buyer's use feeds the calculation.

Why is the same subscription taxable in New York and exempt in Florida?

States disagree about what a SaaS subscription is, not about how to tax it. Classify remotely accessed prewritten software as tangible personal property or as an enumerated taxable service and the subscription is taxable; classify it as a service because nothing physical changes hands and it isn't.

A taxable result comes out of one of these classification routes:

• Software as tangible personal property. New York taxes a license to remotely access software because the buyer gains constructive possession. Pennsylvania gets there through canned software, taxable however it's delivered.

• An enumerated taxable service. Texas taxes SaaS as data processing; Washington classifies remote access software and digital automated services as retail sales.

• A business-use test. Ohio taxes automatic data processing and electronic information services sold for use in business, so one product can be taxable to one buyer, not another.

Exempt states run that in reverse: no tangible medium, no taxable sale. California, Georgia, and Virginia condition it on documented electronic delivery, so the invoice becomes the evidence.

Twelve states, with each one's economic nexus threshold:

State treatment moves, and cities add a layer: Illinois exempts SaaS while Chicago taxes nonpossessory computer leases under its lease transaction tax. Confirm the current rule with each state before relying on a row.

What creates a duty to collect in a state where you have no office?

Sales into the state do, once they cross a threshold that state set. That's economic nexus, and it dates to the Supreme Court's 2018 ruling in South Dakota v. Wayfair. The 5-4 majority overruled Quill Corp. v. North Dakota, which had required physical presence before a state could compel collection. The statute the Court upheld used $100,000 in sales or 200 separate transactions, and most states copied it. What varies now:

• The dollar figure. $100,000 is the common number; New York, Texas, and California use $500,000.

• Whether transactions count. New York needs both $500,000 and more than 100 transactions. Ohio, Georgia, and Virginia use "or." Texas, California, and Washington dropped the transaction test, and South Dakota repealed its own in July 2023.

• What goes in the numerator, and over what window. Some states count gross sales including exempt and resale transactions, others retail sales only. New York measures the preceding four sales tax quarters, Texas twelve months, Ohio the current or preceding calendar year.

Crossing a threshold means registering and collecting going forward. It settles nothing about whether your product is taxable there, which is why a vendor can be registered in a state and still charge zero tax.

Where in the billing flow does the tax get calculated?

After rating and before the invoice finalizes. Tax sits on a computed subtotal: meter usage, rate it, apply discounts and credits, then tax what's left. Apply a discount after tax and you remit on revenue you never collected.

Four things about the customer resolve before a draft invoice can finalize:

1. A validated service address. Rates combine state, county, city, and district. A ZIP code isn't enough: ZIP boundaries and taxing jurisdictions don't line up.

2. Exemption status with a certificate on file. Resellers, nonprofits, and government buyers claim exemption, but a stale certificate puts the liability back on you at audit.

3. A tax category per line. One invoice can carry a taxable subscription, an exempt services line, and overage charges that follow the subscription.

4. How the buyer uses the product, in Ohio-style states. Business use versus personal use changes the answer, and only the customer record knows.

Prepaid credits add a timing question: some states tax the top-up, others tax consumption as the balance burns down. Where a merchant of record sits between you and the buyer, that entity carries the collection duty.

Related terms

These sit closest to a SaaS tax decision:

• Merchant of Record is the entity whose name carries the remittance liability on each sale.

• Billing vs Invoicing marks the boundary tax calculation has to land inside.

• Draft Invoice holds a computed tax figure while it can still be corrected.

• Consolidated Invoicing gets complicated when child accounts sit in different taxing jurisdictions.

• Overage Charges inherit the taxability of the plan they attach to.

FAQ

Who owes the money if I never collected sales tax I should have?

You do. The state assesses uncollected tax against the seller, plus interest and penalties, and you can't bill customers who already churned. Most states run voluntary disclosure agreements that cap the lookback period and often waive penalties.

Is sales tax charged on prepaid credits?

It depends on whether the state taxes the underlying service and when it treats the sale as occurring. Where the service is taxable, some states tax the credit purchase and others tax consumption. That choice decides whether tax shows on the top-up or on the usage.

Does the customer's billing address or their users' location set the rate?

Usually the service address, not the billing address. New York sources tax to where the software users sit, and Pennsylvania presumes in-state users when the billing address is in Pennsylvania. Customers with users in several states may need the charge apportioned.