Is SaaS taxable? Sales tax on software and digital products

Sales tax laws were written for physical goods. Each state has had to decide whether software accessed over the internet is tangible property, a digital product, a taxable service or none of these.

• Some states tax SaaS as prewritten software, even when nothing is downloaded.
• Some tax it as a digital product or data processing or information service.
• Some, like Virginia, generally do not tax it, because no tangible property changes hands.
• Some tax it only for personal use or at a reduced rate for business use.

Rules change often. Maryland added digital products in 2021 and a 3% tax on IT and software services in 2025. Check the current rule before you rely on any list.

Maryland. Digital products and digital codes became taxable at 6% on March 14, 2021, as explained in Business Tax Tip #29. SaaS sold for individual use is a digital product at 6%. Starting July 1, 2025, Maryland also taxes data, IT and software publishing services (NAICS 518, 519, 5415 and 5132) at 3%. Under Technical Bulletin No. 56, SaaS bought for commercial use in an enterprise computer system is taxed at 3%. If both rates could apply, the higher rate applies. Starting July 1, 2026, sales between members of the same affiliated group are exempt.

DC. The Office of Tax and Revenue treats canned, prepackaged and customized software as taxable data processing services under 9 DCMR § 474.4. Its Digital Goods Sales Taxability Chart also lists apps, e-books, music and streaming as taxable digital goods. The general rate is 6%. OTR has postponed the scheduled increase to 7% and says 6% applies through September 30, 2027.

Virginia. Software delivered electronically is not taxable because no tangible property is transferred. In Ruling P.D. 20-65, the Tax Commissioner removed cloud-based software accessed over the internet from an audit. Keep contracts and invoices that show electronic delivery. A 2026 bill, HB 900, would have taxed digital products and software services from 2027. It had not been enacted as of October 2026.

Most states source a SaaS sale to where the customer uses the software. In practice that is often the customer’s billing or service address. Where your company is located does not decide it.

Business customers with users in many states complicate this. Maryland lets an authorized buyer give the vendor a multiple points of use (MPU) certificate and apportion the tax by where the software is used. From January 1, 2027, Maryland requires a separate MPU certificate for each vendor, and the buyer’s authorization renews every two years.

You collect only where you have nexus. For SaaS, that usually means passing a state’s economic nexus threshold or having employees there. Thresholds for DC, Maryland and Virginia are in our e-commerce sales tax guide. Remote employees can also create nexus, as covered in multi-state nexus.

1. List what you sell. Separate subscriptions, setup fees, training, consulting and support. States can tax these differently.
2. Collect customer locations. Capture a service address for every customer, not just a card billing ZIP.
3. Track sales by state. Watch dollars and transaction counts against each state’s threshold.
4. Check taxability state by state. Start with states where you have customers and nexus.
5. Collect exemption certificates. Keep resale, exempt-organization and MPU certificates on file.
6. Fix the past first. If you already have exposure, ask a CPA about voluntary disclosure before you register.

Sales tax is one piece. For income tax, Section 174 and R&D credits, see taxes for SaaS and software startups.

Best for: SaaS and software companies selling into DC, Maryland, Virginia and other states that are unsure where their product is taxable.

1. Free initial consultation. Walk us through your product, pricing and customer locations.
2. Fees quoted upfront, in writing. Transparent, fair fees in an engagement letter.
3. Taxability and nexus review. We map where your product is taxable and where you have nexus.
4. Registration and setup. We register where needed and align your billing system with the result.
5. Filing and books. We file returns and keep sales tax separate from revenue in your startup accounting.