Software as a service (SaaS) is a model where software is hosted in one place but licensed by subscription for use by customers.
Some states consider SaaS as actually a service. So, if services are generally taxable in the state – such as in Arizona – then SaaS is considered taxable. In most states, where services aren’t taxable, SaaS also isn’t taxable.
Other states, like Washington, consider SaaS to be an example of tangible software and thus taxable. Just like with anything tax related, each state has made their own rules and laws.
The list below compiles all SaaS-related state sales tax laws.
Digital products mean movies, books and eBooks, music, ringtones, photographs, and magazine and newspaper subscriptions. This category does not include SaaS.
Downloads vs. Digital Products Accessed Online
Some states differentiate between digital products that you download to your own device and digital products that you access online but do not download (state tax code usually refers to downloaded or electronic access as "transferred electronically").
Example: Some states consider buying a movie and having it transferred electronically to be taxable, while “renting” that same movie to not be taxable.
Physical Property vs. Digital Downloads
Another distinction is the difference in taxability between software, music, movies, etc. bought in physical format (i.e. on a DVD) versus software bought or accessed online.
Historically, software, movies, music, or other similar items bought in physical format were considered “tangible personal property” and subject to sales tax in almost every state.
However, some states considered the equivalent product purchased and accessed electronically to be taxable, while others did not (since it wasn’t purchased in physical format).
For the states that consider digital products as tangible personal property, many state that the product is tangible because it can be "perceived by the senses."
Some states specify that digital products are taxable in the state, but only if their physical equivalent is also taxable.
For example, in Colorado, physical newspapers that qualify as “legal publications” are not taxable.
Since a digital copy of this type of newspaper is considered another form of newspaper (to Colorado state), a digital newspaper wouldn’t be taxable in Colorado. Likewise, non-legal publications newspapers, books, music, movies, or other forms of media in digital form are taxable in both physical and digital form.