Is SaaS taxable? A guide to state and local sales tax rules

By Matt Ringwelski, CPA

If your business sells or deals in Software as a Service (SaaS), you may already know that several states require sales tax on these offerings. What you may not be aware of is that certain local jurisdictions across the U.S. also impose a sales tax on SaaS.

Understanding these evolving state and local tax (SALT) requirements is critical—not just for compliance but also to avoid unexpected financial liabilities. Here’s what you should know about where SaaS is taxable and how it may impact your business.

Is your business required to pay local tax on SaaS?

Any business that provides SaaS to customers throughout the U.S. could be affected by local sales tax laws. This applies to companies across various industries—not just technology firms.

What qualifies as SaaS for tax purposes?

A business is considered to provide SaaS if it:

• Sells cloud-based software over the internet.
• Provides access to software through a service model (subscription-based or hosted).
• Uses third-party software to deliver digital services such as data analytics, AI-driven tools, or client platforms.

For example, an accounting firm that provides clients with cloud-based financial software as part of its services would likely be subject to SaaS tax laws, even though it is not a software company.

Where is SaaS taxable? A look at local jurisdictions

Even if a state does not tax SaaS, some local governments do. Here are some key jurisdictions where SaaS is currently taxable:

• Chicago, Illinois – Despite Illinois not taxing SaaS at the state level, Chicago enforces its own 9% tax on “nonpossessory computer leases,” which includes SaaS.
• Certain municipalities in Colorado – While Colorado does not tax SaaS statewide, some cities, such as Denver, impose local taxes. The rules vary by city, making it essential for businesses to check local regulations.
• Select parishes in Louisiana – The state of Louisiana does not tax SaaS, but some local parishes have introduced their own SaaS tax policies.

Chicago’s 9% SaaS tax

Chicago enforces a 9% Personal Property Lease Transaction Tax on certain software-related services. This tax applies to SaaS products, remote software access, and other cloud-based digital services.

Local SaaS tax policies in Colorado

Colorado does not have a uniform state-level tax on SaaS. However, cities such as Denver have chosen to tax SaaS independently. Businesses operating in multiple municipalities should review specific city tax policies.

Louisiana’s SaaS tax variability

Although Louisiana does not enforce a statewide SaaS sales tax, certain parishes have introduced their own taxation rules. Since these laws differ by jurisdiction, businesses selling SaaS in Louisiana should conduct local tax assessments.

What happens if you don’t remit sales tax on SaaS?

Failing to collect or remit the correct SaaS sales tax could result in:
• Audits from state or local tax authorities.
• Significant back taxes owed, including for previous noncompliance.
• Penalties and interest charges added to unpaid tax amounts.
• Reduced business valuation during financial due diligence.

How SALT noncompliance can impact your business valuation

It’s a scenario many business owners don’t think about: If you were to sell your business, potential buyers will hire an accounting firm to perform due diligence on your financials—including tax compliance.

These due diligence teams are thorough. Their goal is to identify financial risks that could give buyers leverage to negotiate a lower purchase price.

If they discover you haven’t been meeting a local sales tax requirement, the financial impact can be significant. For instance, say you’re asking $10 million for your business. If due diligence reveals that your company owes $500,000 in unpaid SaaS taxes in Chicago, the buyer is likely to reduce their offer by at least that amount—if not more, to account for interest, penalties, and risk.

What you should do to reduce your risk

Given the relative obscurity of SaaS taxation, it’s not uncommon for businesses to be unaware of their obligations. However, the consequences of missing local taxation requirements can be significant—potentially leading to audits, penalties, and financial liabilities.

Key steps to avoid noncompliance and sales tax exposure

• Review your firm’s service offerings – Identify whether any of your services qualify as SaaS under state or local tax laws.
• Assess your customers’ billing and ship-to addresses – Determine where the service is being used and where agreements are executed to establish tax liability.
• Monitor state and local tax updates – Regulations surrounding SaaS tax compliance are constantly evolving.
• Consult with a tax advisor – If you suspect your business may be out of compliance, seek guidance from a professional to assess your risk and resolve issues proactively.

Let Abdo shine a light on SaaS tax compliance

SALT regulations—and the local taxation of SaaS—continue to evolve.

If you are unsure whether your SaaS offerings are subject to local tax, the Abdo team can help. We can review state and local tax requirements in the jurisdictions where your business operates—helping you stay compliant and financially protected.

For clarity on your SaaS tax obligations, contact us today.