Over the past several years software as a service (“SaaS”) has been a booming industry. Pioneers in the cloud computing industry, like Salesforce, have developed web based applications that offer a wide range of services to the user. Driven by competitors such as Microsoft, Adobe, Sap, ADP, Oracle, IBM, Intuit and Google, the SaaS industry has become a $204 billion industry and grown by more than 16% last year.
Traditionally, from a sales tax perspective, states tax the sale of tangible personal property but not services. While many states adhere to that mantra, several states have moved towards taxing software despite being intangible in nature. Still, it can be difficult to determine whether SaaS is more like a software, which may be taxable, or if it feels more like a service provided, which is not taxable in many states.
States have been consistently inconsistent across the country in determining whether to tax SaaS. States often have similar statutes and reach completely different conclusions in their quest to analyze SaaS. Further, many situations occur in which a state can treat two seemingly similar SaaS companies differently within their own state. In an attempt to comply, companies often struggle with charging the appropriate sales tax in the correct state and/or their state income tax obligations, with respect to SaaS.