What SaaS Companies Need to Know About State Tax Obligations

As software companies shift to subscription-based models and expand across state lines, tax obligations grow less predictable—and more costly when overlooked. Sales tax on Software-as-a-Service (SaaS) is no longer limited to where a company is headquartered. Instead, tax exposure may follow where products are used, where customers are billed, or even where remote team members live.

States and localities are also increasing enforcement efforts, making compliance more demanding. Beyond sales tax, other obligations such as personal property tax, payroll tax for remote team members, and business registration requirements may apply as operations expand across jurisdictions.

Inconsistent tax treatment from one state to the next creates real risk. A handful of states apply traditional sales tax rules to digital services. Others treat SaaS as exempt. Several impose separate digital goods or gross receipts taxes. In some cases, website features may create tax exposure. As a result, multistate compliance often requires jurisdiction-by-jurisdiction analysis.

SaaS companies should not wait for a notice from a state tax authority or a due diligence request from a potential buyer before evaluating exposure. Planning ahead allows for informed decision-making, cleaner contracts, and better outcomes if past noncompliance needs to be addressed.

Understand Where and How Tax Obligations Arise

For SaaS companies, taxability hinges not only on what is being sold but where and how it is delivered. States take different approaches to defining digital goods and services, and the rules often shift faster than most businesses can track. Some states treat SaaS as taxable tangible personal property. Others classify it as a nontaxable service. A few impose standalone taxes on digital products layered on top of or in place of sales tax. In addition, companies should be aware of registration and licensing requirements that may apply when doing business in new states.

Nexus is another key factor. It defines whether a company has a sufficient connection to a state to trigger tax obligations. Historically, nexus was rooted in physical presence—owning property, leasing office space, or employing team members. Today, most states also impose economic nexus thresholds based on annual sales or transaction volume, often with a low bar for enforcement. In other words, a business may be liable for tax in a state where it has no office, warehouse, or personnel. Remote or telecommuting team members can also create nexus in states where a company may not have a physical office, increasing the footprint that triggers tax obligations.

It does not stop there. Some states impose franchise, gross receipts, or net worth taxes, which apply even when income tax does not. At the same time, various economic development incentives and tax credits, such as research and investment credits, may be available to help offset tax liabilities. Companies should consider where their customers are located, where invoices are sent, and where users actually access the software. These distinctions can influence whether tax applies—and who is responsible for collecting and remitting it.

Bundled offerings can introduce further complexity. If software is sold alongside consulting, implementation, or support services, the taxability of the entire transaction may depend on how charges are structured. A single, all-in price could make an otherwise nontaxable service subject to sales tax. Separately itemizing charges in the contract may reduce or eliminate this exposure. Regular contract reviews and clear itemization of charges remain essential to managing tax exposure as offerings and billing models evolve. Likewise, as business models change, companies should routinely revisit how their offerings are categorized and billed.

Reduce Risk Through Planning and Proactive Compliance

Leverage Technology

Many CFOs leverage modern technology solutions to streamline the process of tracking nexus, taxability, and filing requirements across multiple states, enabling more efficient and proactive compliance management.

SaaS companies often discover tax exposure only after the fact—during an audit, a funding round, or an acquisition. In many cases, the issue is not negligence but complexity. The rules vary, the thresholds are low, and most businesses prioritize growth over jurisdictional nuance. Still, the cost of inaction can grow quickly if left unaddressed.

Perform a Nexus Study

A nexus study is often the right starting point. This involves reviewing the company’s operational footprint—where team members are based, where customers are located, and how revenue flows across state lines. With that analysis, businesses can make informed decisions about registration, tax collection, and where ongoing monitoring is needed.

Consider Voluntary Disclosure

Companies that identify a gap in prior compliance may have options. Many states offer Voluntary Disclosure Agreements (VDAs), which allow businesses to come forward, report liabilities, and in return receive reduced penalties and limited lookback periods. These programs are not automatic and require careful negotiation, but they offer a path forward that can significantly reduce long-term risk.

Review Regularly

Compliance should not be treated as a one-time project. As team locations shift, offerings expand, or sales increase, tax obligations may change. Routine review helps companies stay ahead of exposure and avoid surprises during financial events or regulatory review. For SaaS providers scaling rapidly or preparing for a transaction, building compliance into operational planning can preserve value and protect margins.

FAQs

1. Is SaaS subject to sales tax in every state?

No. Some states treat SaaS as taxable tangible personal property, while others exempt it as a service. A handful impose separate digital goods or gross receipts taxes. Because rules vary, companies must evaluate state-by-state.

2. How does having remote employees affect state tax obligations?

Remote employees can create ‘nexus’ in the states where they live, even if the company has no physical office there. This may trigger sales tax, payroll tax, or business registration requirements.

3. What is a nexus study, and why is it important for SaaS companies?

A nexus study reviews where your business activities, customers, and employees create taxable presence. It helps identify where you must register, collect, and remit taxes—reducing the risk of penalties and surprise liabilities.

4. What happens if my SaaS company discovers past noncompliance?

Many states offer Voluntary Disclosure Agreements (VDAs), which allow businesses to come forward proactively. VDAs can reduce penalties and limit how many prior years the state can audit.

5. How often should SaaS companies review their tax exposure?

Tax obligations should be reviewed regularly—especially when sales expand, offerings change, or employees relocate. Ongoing review ensures compliance and avoids costly surprises during funding rounds, acquisitions, or audits.

How We Help

Navigating multistate tax rules is complex, but SaaS and technology companies do not have to manage it alone. AAFCPAs offers a comprehensive suite of SALT solutions designed to support growth, reduce risk, and maintain compliance.

We begin with nexus studies that assess your operational footprint to identify where sales or income tax obligations arise and quantify associated risks. Based on those findings, we recommend where to register and help establish systems for ongoing compliance.

If past noncompliance is identified, we prepare and manage voluntary disclosure filings to mitigate penalties and limit lookback periods. Our ongoing support includes monitoring evolving tax rules—and of course, tax return preparation—ensuring your business stays compliant as it scales.

Our expertise extends beyond SaaS to encompass gross receipts taxes, pass-through entity taxes, economic development incentives, payroll tax issues related to remote team members, and unclaimed property. Clients value our combination of deep technical knowledge and responsive service, which helps them make informed decisions with confidence.

These insights were contributed by Brian O’Hearn, CPA, MSA, Tax Manager.

Questions? Reach out to our authors directly or your AAFCPAs partner.

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