Texas

Understanding Sales Tax for SaaS in Texas

Is SaaS Taxable in Texas?

Texas classifies SaaS as a taxable data processing service, subjecting it to the state’s sales and use tax at a rate of 6%.

Distinction for B2B vs. B2C Transactions:

In Texas, the taxability of SaaS does not differ between business-to-business (B2B) and business-to-consumer (B2C) transactions; both are subject to sales tax.

Classification Criteria:

To determine if your SaaS product is taxable in Texas, consider the following:

Nature of the Service: SaaS is considered a data processing service and is taxable.
Exemptions: Texas provides a 20% exemption on the value of data processing services, meaning only 80% of the charge is subject to tax.

Determining SaaS Taxability

As of October1, 2019, Texas established an economic nexus threshold, requiring out-of-state sellers with over $500,000 in annual gross receipts from Texas to collect and remit sales tax, even without a physical presence in the state.

Nexus Thresholds for Texas

Physical Nexus
Businesses with an office, employees, or other tangible operations in Texas are required to collect and remit sales tax.
Economic Nexus
Out-of-state businesses must comply if they exceed $500,000 in gross receipts from Texas sales during the preceding 12 months. This threshold, established on October 1, 2019, was influenced by the South Dakota v. Wayfair ruling.

Sales Tax Compliance Checklist

Register Your Business
Obtain a sales tax permit from the Texas Comptroller’s Office.
Collect the Correct Tax Amount
Texas imposes a base rate of 6%, but local taxes can increase the total to 8.25%. Ensure the correct combined rate is applied to every transaction.
File Regular Returns
Businesses must file returns monthly, quarterly, or annually, depending on the amount of tax collected.
Remit Tax Payments on Time
Send collected taxes to the Texas Comptroller’s Office promptly to avoid interest charges and penalties.

Examples of Taxable SaaS in Texas

Subscription fees for cloud-based software applications.
SaaS platforms used for business productivity, such as CRM tools or project management software.
Custom software developed specifically for a client and delivered electronically.
In many states, separately stated consulting fees related to software implementation are exempt. However, in Texas, if the seller of the software (or SaaS) charges for consulting related to the software itself, it is generally deemed to be taxable, even if separately stated.

Examples of Non-Taxable SaaS in Texas

SaaS provided to certain exempt organizations, such as government agencies or non-profits.

Local Tax Considerations in Texas

Texas’s base sales tax rate is 6%, but local jurisdictions may add additional taxes, bringing the combined rate up to 8.25%. Businesses must track the location of their customers to ensure the correct tax rate is applied.

Penalties for Non-Compliance in Texas

Late Filing Penalties
Penalties accrue if sales tax returns are not filed by the due date.
Interest on Outstanding Tax
Unpaid taxes accrue interest until fully remitted, increasing the financial burden.
Audit Risks
Non-compliance can trigger audits, potentially resulting in back taxes, penalties, and interest charges.