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In most states, where services aren't taxable, SaaS also isn't taxable. Other states, like Washington, consider SaaS to be an example of tangible software and thus taxable. Just like with anything tax related, each state has made their own rules and laws.
In New York, SaaS and cloud computing are considered taxable because it involves a revenue stream from a license to use or direct the use of the software. Electronically downloaded software is also considered taxable because the state defines it as tangible personal property.
Requirements for prewritten software are still subject to sales and use tax regardless of the method of delivery (whether with a physical medium, downloadable or accessed via the Internet) or if possession or control is given.
Only two states Tennessee and Vermont have specific statutes in place to address SaaS transactions and sales tax.
The Arizona Department of Revenue (Department) issued a taxpayer information ruling stating that a taxpayer's gross income from transactions provided through the use of computer software is not subject to tax under the personal property rental classification for Arizona Transaction Privilege Tax purposes.
Sales and use tax does not apply to SaaS, which California defines as, A customer gains access to software on a remote network without receiving a copy of the software, while the seller retains exclusive possession and control of it. While California has not specifically codified the SaaS revenue stream, the state
Subscription products are an indirect transaction. The customer pays a subscription fee that covers the cost of goods. The thing to be mindful of is that the products are subject to sales tax. So you have to tax the goods through the monthly subscription fee.
Subscription income from online database was subject to transaction privilege tax under the state and city personal property rental classifications.
Additionally, software subscriptions services are considered tangible property and are subject to sales and use taxes.
Sales of canned software - downloaded are subject to sales tax in Arizona. Sales of custom software - delivered on tangible media are exempt from the sales tax in Arizona.