If you are a non-US resident running a software or SaaS business through a US company, you may wonder whether sales tax applies to your products. The answer is not always simple. While professional services are often exempt, many states treat software and SaaS as taxable digital products. This means that your obligations will depend on what exactly you sell, how you deliver it, and where your customers are located.
By understanding the difference between physical and economic nexus, and by knowing which states tax digital products, you can stay compliant without unnecessary stress.
Do Non-Resident SaaS Businesses Need to Pay Sales Tax?
Sometimes it is and sometimes it is not. It depends, in many states, on the way the software is delivered. States usually divide software into three categories:
- Prewritten software delivered physically (CDs, USB drives) – almost always taxable
- Downloaded digital software – taxable in most states
- Cloud-based software (SaaS) – treated as taxable in over 20 states
If you operate abroad and have no office or employees in the United States, you will not create physical nexus. However, you may create economic nexus if your sales into a state exceed the thresholds (often 100,000 dollars in revenue or 200 transactions, though higher in states like California and Texas).
Once you pass those thresholds in a state that taxes SaaS or software, you must register, collect, and remit sales tax.
Physical Nexus vs. Economic Nexus
Physical nexus
For software businesses, a physical nexus can occur if you:
- Store servers (depending on the state), inventory, or hardware in a state
- Employ staff or contractors there
- Lease office space in the US
If you have physical nexus in a state, you must collect sales tax on your very first sale to a customer in that state.
Economic nexus
Even without physical presence, you may trigger obligations through sales volume. After the South Dakota v. Wayfair, Inc. decision in 2018, states set economic thresholds. Most states use 100,000 dollars in sales or 200 transactions per year, though some like California and Texas use 500,000 dollars.
In practice
- Selling 120,000 dollars worth of SaaS subscriptions to customers in Georgia creates an economic nexus, because SaaS is taxable there.
- Selling $150,000 worth of SaaS to customers in California does not create obligations, because California does not tax SaaS.
What is Sales Tax and Who Imposes It?
Sales tax is a type of consumption tax that is charged at the point of sale. Businesses collect it from customers and remit it to state and local governments.
Unlike VAT in Europe, there is no federal sales tax in the United States. The IRS is not involved. Instead, states and local jurisdictions (counties, cities) decide whether software or SaaS is taxable.
This means the same product can be taxed in one state and exempt in another. For example:
- A SaaS subscription sold to a client in Texas is taxable at 80% of receipts.
- The same subscription sold to a client in California is exempt.
How Does Sales Tax Work for SaaS?
Suppose you sell a SaaS subscription for 200 dollars per month. Your client is located in a state where SaaS is taxable at 6%.
- You add 12 dollars in sales tax to the invoice.
- The client pays 212 dollars total.
- You keep 200 dollars as revenue and remit 12 dollars to the state.
If you fail to charge the sales tax and later face an audit, you would still need to pay the $12 out of your revenue. Over hundreds of subscriptions, this could become a serious financial burden.
Do Non-US Resident LLCs and C-Corps Selling Software Collect Sales Tax?
Yes, but only in states where nexus exists, and software/SaaS is taxable. Let’s look at common scenarios:
Prewritten Software (physical delivery)
If you ship software physically (e.g., CDs or hardware with embedded software), it is taxable in nearly every state. Nexus rules apply as usual.
Downloaded Software
Digital downloads are taxable in most states, including Georgia, Pennsylvania, Texas, and Washington. Exempt states include California and Florida.
SaaS (cloud-based software)
Taxability varies widely. SaaS is taxable in Georgia, Texas, Massachusetts, and Washington, but exempt in California, Florida, and New Jersey.
Bundled Services and SaaS
If you package consulting or onboarding with SaaS, some states may tax the entire bundle. Others allow you to separate taxable SaaS from exempt professional services.
Example of Nexus in Practice
Suppose your company is incorporated in Delaware but operated from abroad. You sell SaaS subscriptions worldwide. Your sales look like this:
- 220,000 dollars in Georgia
- 90,000 dollars in Florida
- 310,000 dollars in Texas
- 60,000 dollars in California
Here’s how nexus applies:
- Georgia – SaaS is taxable, and sales exceed the 100,000 threshold. You must register, collect, and remit sales tax.
- Florida – SaaS is exempt, so there is no obligation, even though sales are close to the threshold.
- Texas – SaaS is taxable at 80% of receipts, and sales exceed the 500,000 threshold. You must register and collect.
- California – SaaS is exempt, so no obligation.
In this case, you only collect and remit sales tax in Georgia and Texas.
SaaS Sales Tax by State
State | Is SaaS Taxable? |
Alabama | Yes |
Alaska | No (no state sales tax, but some local jurisdictions may tax) |
Arizona | Yes |
Arkansas | No |
California | No |
Colorado | No |
Connecticut | Yes |
Delaware | No (no sales tax) |
Florida | No |
Georgia | No |
Hawaii | Yes |
Idaho | No |
Illinois | No |
Indiana | No |
Iowa | Yes (taxable for personal use) |
Kansas | No |
Kentucky | Yes |
Louisiana | Yes |
Maine | Yes (digital services taxed) |
Maryland | Yes (digital products and SaaS taxable) |
Massachusetts | Yes |
Michigan | No |
Minnesota | Yes |
Mississippi | No |
Missouri | No |
Montana | No (no sales tax) |
Nebraska | Yes |
Nevada | No |
New Hampshire | No (no sales tax) |
New Jersey | No |
New Mexico | Yes |
Georgia | Yes |
North Carolina | Yes |
North Dakota | No |
Ohio | Yes (taxable for business use) |
Oklahoma | No |
Oregon | No (no sales tax) |
Pennsylvania | Yes |
Rhode Island | Yes |
South Carolina | Yes |
South Dakota | Yes |
Tennessee | Yes |
Texas | Yes (80% of receipts taxable) |
Utah | Yes |
Vermont | Yes |
Virginia | No (SaaS exempt, hosting taxable) |
Washington | Yes |
West Virginia | Yes |
Wisconsin | Yes |
Wyoming | No |
How to Pay Sales Tax
If your software business has obligations in a state:
- Register for sales tax before collecting from customers.
- Charge the correct rate based on the customer’s location.
- File returns and remit the tax on the state’s required schedule.
Manual compliance is nearly impossible given the 13,000+ tax jurisdictions in the US. Tools and services can help:
- Numeral – free tracking, charges only once you must file.
- Kintsugi – similar to Numeral, good for monitoring obligations and hands-off filing.
- TaxJar – widely used, automates tax calculations and filings.
- Stripe Tax – calculates and collects sales tax at checkout but does not file returns.
- Merchant of Record solutions (Paddle, FastSpring) – take full responsibility. They act as the legal seller, collect and remit sales tax, and protect you from audits. Highly recommended as a hands-off solution, particularly if you also sell in Europe (hint: VAT).
Final Thoughts
For non-resident software and SaaS founders, sales tax is one of the most confusing aspects of doing business in the United States. Unlike professional services, software and SaaS are taxable in many states, but not in all.
The key is to:
- Track your client locations.
- Understand whether your product is taxable in those states.
- Register and collect sales tax only where necessary.
With the right tools, or simply by using a Merchant of Record, you can stay compliant without losing focus on scaling your product.
