Washington

Understanding Sales Tax for SaaS in Washington

Is SaaS Taxable in Washington?

Yes, Washington has specific regulations that classify SaaS, referred to as “remotely accessed software” (RAS), as taxable at 6.5%.

The state defines RAS as prewritten software provided remotely, where the buyer pays for the right to access and use the software residing on the seller’s or a third party’s server. This classification subjects SaaS to retail sales tax and the Business and Occupation (B&O) tax.

Distinction for B2B vs. B2C Transactions

Washington’s tax code does not differentiate between business-to-business (B2B) and business-to-consumer (B2C) transactions regarding SaaS; both are subject to the same tax obligations.

Determining SaaS Taxability

To ascertain if your SaaS product is taxable in Washington:

Product Classification: Washington considers all prewritten software, including SaaS, as taxable digital products, regardless of delivery method.
Nexus Determination: Establish if your business has a tax nexus in Washington, which can be physical (e.g., office, employees) or economic. Economic nexus is established if your business has over $100,000 in annual sales within the state.

Sales Tax Compliance Checklist

To comply with Washington’s tax regulations:

Register for a Tax Account: Businesses meeting nexus criteria must register with the Washington Department of Revenue (DOR).
Collect Sales Tax: Once registered, collect the appropriate sales tax on all taxable SaaS transactions.
File and Remit Taxes: Regularly file sales tax returns and remit collected taxes to the DOR as per the assigned filing frequency.

Examples of Taxable vs. Non-Taxable SaaS in Washington

Taxable: Subscription fees for prewritten software accessed online.
Non-Taxable: Custom software developed specifically for a client, provided certain conditions are met.*

*Note: Although custom software is not subject to sales tax, it may still be subject to WA’s B&O tax.

Local Tax Considerations in Washington

In addition to the state sales tax rate of 6.5%, local jurisdictions in Washington may impose additional sales taxes, leading to varying total tax rates depending on the location of the sale.

Penalties for Non-Compliance in Washington

Non-compliance with Washington’s tax laws can result in penalties, interest on unpaid taxes, and potential legal action. Ensuring accurate collection, reporting, and remittance of sales tax is crucial to avoid such consequences.