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Connecticut advises that software delivered electronically and data processing services are taxable. This includes software offered through a subscription service. SaaS falls within computer and data processing services, which is taxable at a reduced rate.
Generally, a business has nexus in Connecticut when it has a physical presence there, such as a retail store, warehouse, inventory, or the regular presence of traveling salespeople or representatives. However, out-of-state sellers can also establish nexus in the ways described below.
Only two states Tennessee and Vermont have specific statutes in place to address SaaS transactions and sales tax.
Business Use: Electronically accessed or transferred canned or prewritten software, and any additional content related to such software, that is sold to a business for use by the business remains taxable at the 1% rate as computer and data processing services.
Canned or prewritten computer software is tangible personal property. The sale, leasing, or licensing of the software (including upgrades) is taxable at 6%.
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.
California: SaaS is not a taxable service. However, software or information that is delivered electronically is exempt. The ability to access software from a remote network or location is exempt. Under California sales and use tax law, there must be a transfer of TPP, in order to have a taxable event.
Sales of canned software - delivered on tangible media are subject to sales tax in Connecticut. In the state of Connecticut, so long as no tangible personal property was delivered to the buyer in addition to downloaded software, the software will be taxed at 1% rate applicable to computer and data processing services.
Several exemptions are certain types of safety gear, some types of groceries, certain types of clothing, children's car seats, children's bicycle helmets, college textbooks, compact fluorescent light bulbs, most types of medical equipment, and certain motor vehicles.