Key Takeaways
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States continue to expand their sales tax base to include cloud-based software and digital products.
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SaaS can be taxed differently from state to state.
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Keeping up with evolving rules is essential for compliance.
As technology evolves rapidly, state sales tax laws often struggle to keep up. Software-as-a-service (“SaaS”) has become increasingly common, and yet, state sales tax rules governing SaaS are still evolving. A growing trend among states is the expansion of the tax base into the digital economy, creating new taxability and compliance challenges for SaaS businesses.
In recent years, several states have passed legislation making SaaS subject to sales tax, although their approach to taxation varies. Depending on the jurisdiction, SaaS may be treated as software, a service, a digital product, or something else entirely. The following recent and upcoming legislative changes highlight how states are modernizing their tax codes with different approaches.
Louisiana:
Effective January 1, 2025, Louisiana expanded its tax base to expressly include providing prewritten computer software access as a taxable service, among other digital products. This specifically includes charges made to customers for the right to access and use prewritten software that is maintained by the seller, regardless of the basis for the charges (per use, per license, subscription, etc.)
Prior to these changes, software in Louisiana was considered taxable as tangible personal property when it was:
- Delivered on tangible media;
- Installed on a Louisiana device; or
- Downloaded to a Louisiana device.
Because SaaS generally does not fall into any of those categories, it was not considered tangible personal property and therefore was not subject to sales tax. The changes in Louisiana are indicative of the broader trend of states expanding their tax base to keep up with the modern economy.
Washington:
While SaaS has long been taxable in Washington as a Digital Automated Service (“DAS”), effective October 1, 2025, ESSB 5814 removed certain exclusions from the definition of DAS, potentially flipping previously nontaxable SaaS to taxable. The following exclusions were removed from the definition of DAS:
- Services that involve primarily human effort;
- Live presentations;
- Advertising; and
- Data processing.
The bill also ushered in changes to the treatment of sales of custom software and customization of prewritten software, which were previously considered nontaxable services. As of October 1, 2025, sales of custom software and customization of prewritten software became taxable, regardless of the delivery method.
While the underlying taxability of most SaaS did not change in Washington, the removal of the exclusions from the definition of DAS, and the inclusion of custom software in the tax base broaden what SaaS providers will need to consider taxable.
See Related: Washington's Expanded Definition of Digital Automated Services: What Businesses Need to Know
California:
California has historically taken a narrow approach to taxing software by only taxing software delivered on tangible media, such as a disk or flash drive. As a result, most SaaS products generally were not subject to California sales tax.
However, effective January 1, 2027, SB 122 will expand California’s tax base to include certain digital products, including prewritten computer software. SB 122 amended California’s definition of tangible personal property to incorporate digital goods, which includes prewritten software transferred electronically or accessed remotely. This marks a significant change in the way that California will tax software, including SaaS.
See Related: California Is Expanding Sales Tax to Digital Products and Software
Colorado:
Historically, Colorado state sales tax only applied to software transferred on tangible media, while most electronically delivered software, including SaaS, was excluded from the tax base. However, effective January 1, 2027, HB 26-1223 changes what is considered taxable software by amending the definition of computer software. In Colorado, computer software is considered to be tangible personal property.
The change effectively taxes most prewritten computer software, regardless of delivery method unless a specific exemption applies. This includes software accessed remotely through internet-based platforms, which generally encompasses most SaaS offerings.
Like California, Colorado’s legislative changes reflect a broader trend of states modernizing their tax codes by expanding the concept of tangible personal property to include SaaS and other digital products.
The Taxation of SaaS Continues to Evolve
As technology continues to evolve, states are reevaluating how SaaS and other cloud-based software fit into their existing sales tax frameworks. Although these states have taken different approaches, they have a common theme: modernizing their tax codes to capture tax revenue on sales of SaaS and other digital products that historically were not subject to sales tax.
These developments show the importance for SaaS providers to continually monitor the taxability of their products. As states continue to modernize their tax codes, staying up to date will help businesses remain compliant.
